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Investments > Bonds > Flashcards

Bonds Flashcards

1
Q

who issues bonds mainly

A

corporates and government

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2
Q

who helps corporates issue bonds

A

institutions eg investment banks

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3
Q

what is the secondary market for bonds

A

the market where securities that have been issued previously are traded

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4
Q

what does OTC stand for

A

over the counter

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5
Q

stocks mostly trade on exchanges

where do bonds mostly trade

A

over the counter
(from buyer to seller)

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6
Q

in what ways is the bond market different from the stock market

A
  1. most companies just issue one type of share at a common price where as lots of bonds can be issued at all different prices and maturity dates
  2. average size of a bond trade tends to be far larger than an equity trade
  3. bonds trade far less frequently so there is much less liquidity in bonds
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7
Q

which are the most liquid type of bonds

A

government bonds

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8
Q

do retail investors usually buy bonds

A

no far too complex

minimum trading price also very high so most often done by institutional investors

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9
Q

is the issuer of the bond involved in the secondary market trading of the bond

A

no

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10
Q

what is refinancing

A

when a company issues a new bond to pay off old bond debt

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11
Q

what is a refinancing cliff

A

one huge outstanding bond that occurs at one point in time and needs to be paid off

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12
Q

what is a better approach than having a refinancing cliff

A

a range of long and short term bonds so the refinancing risk is spread over time

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13
Q

what are the sectors of the bond market

A
  1. treasury
    2, agency
  2. municipal
  3. corporate
  4. asset backed
  5. mortgage
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14
Q

what is a treasury bond

A

securities issued by the US government

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15
Q

what is an agency bond

A

securities issued federally related to institutions and government sponsored enterprises

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16
Q

what is a municipal bond

A

securities issued by state and local government bonds

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17
Q

what is a corporate bond

A

securities issued by corporations

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18
Q

what is an asset backed bond

A

securities backed by pool of assets

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19
Q

what does a bond price refer to

A

the price it is trading for on the secondary market

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20
Q

what two elements about the bond are fixed

A

maturity date
coupon

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21
Q

what type of relationship do the bond price and yield have

A

inverse

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22
Q

what is the name of the price the bond is issued at

A

par

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23
Q

when the bond is retraded, we state it in terms of its

A

yield

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24
Q

if a bond is trading above par eg 110 what does this mean

A

the coupon must be too high

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25
Q

if a bond is trading below par eg 90 what does this mean

A

the coupon must be too low

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26
Q

if a bond is trading at par what does this make the coupon equal to

A

yield to maturity

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27
Q

why might the coupon of a bond be considered too high or too low

A

at the date of issue, the coupon is correct for that current climate

things change though such as inflation and interest rates and this can determine if the bond coupon is too high or too low

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28
Q

what are the main risk factors for the bond (things that can change the yield)

A
  • interest rates
  • expected inflation
  • credit/default risk
  • liquidity
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29
Q

what is the risk free rate in the eurozone

A

where the German government issue at

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30
Q

how does an increase in interest rates effect bonds trading in the secondary market

A

if interest rates are higher then the existing bonds are less attractive as the nominal value of their coupons is lower

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31
Q

how does increased inflation effect bonds already trading in the secondary market

A

makes less attractive because the nominal value of coupon is lower

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32
Q

how do equities tend to perform in high inflationary periods

A

they do fine as they have floating prices that they can adjust for inflation

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33
Q

how does increased risk effect bonds already trading on the market

A

riskier investment so will be below par value

eg in 2011 investors refuse to lend to Irish government

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34
Q

is more or less liquidity more attractive for bonds

A

more

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35
Q

two ways to measure interest rate risk

A

duration

convexity

36
Q

what is duration (for measuring interest rate risk)

A

the sensitivity of a bond price to change in interest rate

37
Q

how is duration usually stated (interest rate risk)

A

for every 1% change in interest rate, how much will the price of the bond fall

38
Q

what else will effect the duration risk

A

maturity date of the bond

39
Q

what is convexity

A

relationship between bond price and interest rate is not linear, it is curved

how curved = convexity

40
Q

how can credit risk be measured

A

credit spread
credit default swaps

41
Q

what is the credit spread of a return

A

the part that is attributed to its default risk

42
Q

what is a credit default swap

A

derivative product that replicates bond exposure

43
Q

which market is more liquid
- credit default swap
- bond

A

credit default swap

44
Q

which bonds are not exposed to inflationary risk

A

floating rate bonds

45
Q

what is a floating rate bonds

A

a bond which a coupon that is tied to inflation

46
Q

what is the inflation linked bond in the US

A

TIPS (treasury inflation linked bond)

47
Q

what is liquidity risk

A

the ease at which an issue can be sold at or near its value

48
Q

how to measure liquidity risk

A

the size of the spread between the bid price and asking price

the bigger the spread, the more liquidity risk

49
Q

why would investors buy bonds with negative yields

A
  • bond prices may fall but overall they are a much safer investment product than equities, the alternative
  • pension and insurance funds are long term and may have minimum allocation targets for bonds
  • paying money to governments is profitable if a year later the prices go even more negative, can be sold for a profit
  • required to hold them as part of a passive funds, as other bonds mature and roll off, they are replaced with new bonds
50
Q

what is call provision

A

grants the issuer the right to repay the debt, fully or partially, before the scheduled maturity date

51
Q

why would issuer use callable bonds (call provision)

A

option to get cheaper borrowing

52
Q

what is a put provision

A

the bondholder has the right to ask to be repaid after a number of years

53
Q

why would an investor want a putable bond (pull provision)

A

eg if issuers credit risk has worsened they can ask to be paid now to avoid risk of not being paid later

54
Q

what is a convertible bond

A

the bondholder can opt to change the bond into shares

55
Q

why might an investor want a convertible bond

A

want to play it safe with a bond but if things go well with the company, you will benefit more from equitiy

56
Q

what is a currency bond option

A

the bondholder can choose the currency in which they would like to be paid
(coupon and principal)

57
Q

who pays for the embedded option

A

whoever benefits from the option

rests with lender = higher coupon

rests with borrower - lower coupon

58
Q

how much percent of new bond issues are green and social bonds

A

5-10%

59
Q

is there a legal binding for proceeds from green bonds to be ringfenced

A

no

more of a statement of intent

60
Q

examples of spending from social bonds

A

education, health, social housing, reducing inequality

61
Q

what issues exist with green bonds

A

issues of reporting, accountability and standardisation

expected to become more standardised over time

62
Q

what is a greenium

A

there is a greater demand for green bonds

but not so much supply

so willing to pay greenium

63
Q

why are pension funds tax free

A

government trying to incentivise us to smooth consumption

64
Q

what is the time frame of a money market

A

less than 1 year

65
Q

what is the time frame of a cpital market

A

greater than 1 year

66
Q

what is a zero coupon bond

A

does not make coupon payments

67
Q

at what price do zero coupon bonds always sell at

A

discount

68
Q

what is the compenstation for a zero coupon bond

A

the difference between the initial price and the face value ie the payout at the end

69
Q

what is the YTM

A

the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond

70
Q

what is bond pirce

A

present value of all the cash flows generated by the bond

ie the coupons and face value discounted at the required rate of return

71
Q

what does it mean if the bond is selling at a discount

A

selling for less than the face value

72
Q

what does it mean if the bond is selling at par valye

A

selling at face value

73
Q

what does it mean if the bond is selling at a premium

A

selling for greater than the face value

74
Q

what does an investor earn as a return when the bond trades at a discount

A

coupon rate < yield to maturity

return from coupons

face value that exceeds the price paid for the bond

75
Q

what does the investor earn as return when the bond trades at a premium

A

coupon rate > yield to maturity

return from coupons

face value less than price paid for the bond

76
Q

closer to the time of maturity of the bond, what price does the bond move towards

A

par value, face value

77
Q

each time a coupon is paid, what does the price of the bond drop by

A

coupon amount

78
Q

why are shorter term bonds less risky

A

discounted over a shorter period, present values are less dramatically affected by interest rates

79
Q

what does a yield curve plot

A

yields of bonds that have equal quality but differing maturity rates

80
Q

what does the slope of a yield curve tell us

A

an idea of future interest rate changes and economic activity

81
Q

what is the normal slope for a yield curve

A

gentle upward sloping (normal rates of growth expected)

82
Q

when is a steep upward sloping yield curve usually found

A

when bond holders think economy will improve quickly in the future

just at the beginning of economic expansion, at the end of recession

83
Q

what does an inverted yield curve mean

A

investors trying to get in and lock rates before they fall even further

84
Q

what is a prime bond rating

A

AAA

85
Q

upper medium grade bond rating

A

A

86
Q

medium grade bond rating

A

BBB

87
Q

what is the conversion ratio of a convertible bond

A

how many shares can be converted from each bond

Investments (19 decks)

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