Bonds Flashcards
Are bonds quoted at bid or offer?
actually mid market
what is the indexation lag?
IL bonds are calculated 3 months before redemption
How do IL bonds work?
Final coupon and capital are uplifted by RPI
Give one advantage of using strips
each with their own unique
redemption date, can be used to coincide with specific future liabilities
what is a sinking fund requirement?
Call bond - issuer to redeem a specified amount at regular intervals
How are Eurobonds issued?
Bearer form - payable to person holding it
What is a negative pledge in relation to eurobonds?
prevent subsequent bonds from being issued with
greater security.
Give 2 advantages of foreign bonds
Foreign exposure without ER risk - investor
Take advantage of interest rate differentials - issuer
How do non competitive bids for bonds work?
Up to £500k - average of accepted prices
How do corporate bids work?
Indicative bids made then priced accordingly
Why do bonds trade above/below par?
If the coupon is below
current interest rates, the bond’s price will be below par - vice versa
3 reasons for normal yield curve
Liquidity
Inflation
Market segmentation
Reasons for inverted yield curve
IR rates to fall
5 risks of bonds
Credit
Interest rate
Inflation
Liquidity
Exchange rate
2 additional Corporate bond risk
Early redemption (call)
Seniority
What are the last investment grade ratings
BAA
BBB x 2
What are the most volatile bonds?
long and low
Modified duration definition and calc
Bonds price sensitivity to IR changes
1+GRY
2 features of cum dividend
comes with 6 months interest
Buyer compensates by paying price + Interest
3 Features of ex dividend
Interest paid to who owns 7 days before interest date
Bond bought after that that date but before interest date then it goes to seller
Amount deducted from clean price
Describe repo process
Sell Gilt and agree to buy back at set price
Difference is interest cost of loan
Gilt is security on default
What is a Debenture
Secured corporate bond (either fixed or floating charge)
Why is a floating charge higher risk?
Lower priority (can also be sold, fixed can’t)
Macaulay duration line by line:
Present value = cash flow discounted by Interest Rate squared by time
Sum all - this is bond price
Multiply by time and sum all.
Divide this by price
What does the MD actually show and how might it be used
Average number of years until cash flows = price paid
Immunization = Match asset and liability duration so IR changes are irrelevant
