Bonds Flashcards
How frequently do UK & US government bonds tend to pay their coupons?
Twice yearly
How much notice must an issuer give the investor that they are redeeming a bond?
3 months
Which type of bond tends to have the lowest yield?
Developed Government bond
Why do pension funds tend to like index-linked bonds?
It allows them to hedge their liabilities
Which type of UK government bond is compliant with Shariah law?
Sovereign sukuk
Which is the only type of Gilt that can potentially give rise to a CGT liability?
STRIPs
What is the time difference between Treasury Notes, T-Bills and Treasury Bonds
T-Bills - less than 6 months
Treasury Notes - between 2 and 10 years
Treasury Bonds - between 10 and 30 years
What is a debenture (in the UK)?
-Form of secured corporate bond
-Secured by either fixed or floating charge
Why may companies choose to issue Floating Rate Notes?
Hedge against floating rate payments they may receive in the future
Where do PIBS rank in case of liquidation?
Bottom
What is a step-up/step-down bond?
Coupon steps up or down over the life of the bond
What is a convertible bond?
Allows investor the right to convert to a set amount of equity in the issuer at a set date
What is an exchangeable bond?
Allows investor the right to exchange for the shares of another company
What is a eurobond? I.e. Eurodollar bond
A bond denominated in a different currency to the market in which they’re issued?
Eurodollar - dollar denominated but issued outside of the US
Why may a eurobond have greater liquidity?
Issued in several financial centres simultaneously.
Thus a greater investor base.
What is a repo?
An agreement whereby an individual borrows short-term money and provides gilts as security.
What can the lender do when the borrower doesn’t repay his loan from his repo?
Sell the gilts on the open market
What’s the difference between covered bonds and asset-backed securities?
The bank retains covered bonds on their balance sheet.
If a company’s credit rating changes from BBB to BB, what does this indicate about its creditworthiness?
It has become less creditworthy
What will happen to a bond’s price if the issuer’s credit rating falls?
Decrease
What is the dirty price?
How much the prospective buyer will actually pay for the bond
If a bond is cum-dividend, who receives the full coupon?
Buyer
Find the gross redemption yield below:
Coupon = 6%
Clean price = £134
7 years to redemption
Running yield = 6/134 = 4.48%
Annual capital loss = 34/7 = £4.86
GRY = 4.48 - [(4.86/134)*100] = 0.85%
Find the net redemption yield below:
Coupon = 5.4%
Clean price = £117
8 years to redemption
HRT
Running yield = 5.4/117 = 4.62%
Annual capital loss = 17/8 = 2.13
NRY = (4.620.6) - [(2.13/117)100] = 0.95%
What usually drives an inverted yield curve?
Expectation of rising short-term interest rates
What does modified duration tell investors?
% change in a bond’s price given a 1% change in yield
If a bond has a longer duration, what does that say about the maturity, coupon & yield?
Longer maturity
Lower coupon
Lower yield
