Bonds Flashcards
Why does the state use bonds and not borrow from the bank?
Bonds feature a secondary market for investors, meaning higher liquidity. The provision of higher liquidity enables investors to accept a lower interest rate.
What do we need to know of bonds?
Their specification and valuation, the types of bond market securities and other exotic bonds.
What is a Bond?
A promise to make periodic coupon payments and to repay principal at maturity.
How is the principal and interest of the Bond paid?
Principal is paid at maturity.
Interest is paid on regular intervals at a fraction of the annual coupon rate depending on the frequency of the payments.
Who are Bonds issued by?
Corporations and government units
What are the 6 parts of the Bond quote?
RATE MATURITY BID ASK CHG ASK YLD
What is ASK YLD?
The Yield To Maturity (Discount Rate) if purchased at ASK price
What is RATE?
The coupon rate as a percentage of the face value.
What is MATURITY?
The date of maturity (dd/mm/yyyy) of the bond.
What is CHG?
The change from the prior closing price in 32nds.
What is BID?
The price at which the trader will buy the bond (the cheaper value)
What is ASK?
The price at which the trader will sell the bond (the more expensive value)
How do Bonds compare with Equities?
For Issuers: Coupon payments are compulsory (not in Equity)
For Investors: State bonds offer less return but also less risk (opposite in Equity). The exception is some Corporate Bonds and Emerging market State Bonds.
Coupon payments are constant, so what are Yields?
The Yield is the value derived when comparing the future cash flows to the current market price of the Bond.
The Yield is also used to compare different bonds.
What is Yield To Maturity?
The price of a Bond is determined by the present value of the future cash flows of the bond. (1 + r) is the discount factor used. R in this case the YTM.
Thus, if the yield rises, then the price of the bond goes down.
What is the relationship between YTM and IRR?
They are both the same value.
What are the most common bond terminologies?
Bond trading above par value: Premium
Bonds trading below par value: Discount
Bond prices approaching par as they near maturity: Pull to Par
What is the process for Bond purchases between interest payment dates?
Bond may be sold with accrued interest accounted for: Full price
Bond may be sold without accrued interest: Clean price
Which Bonds are of the lowest risk?
G7 Government bonds have very low default risk (apart from Italy).
Corporate and emerging market bonds are much higher.
What risks does an investor take when he buys a Bond?
Inflation may reduce the purchasing power of future repayments.
Market prices may fluctuate.
Re-investment risk attached to the coupon payments
Who does the credit rating of the Bonds?
Moody’s, S & P’s, Fitch
Bond’s are rated according to perceived default risk.
What are Mortgage bonds?
US mortgages which are “securitized” are packaged and sold as publicly traded bonds. This makes debt more liquid and attractive to investors.
What are Eurobonds?
Long-term bonds sold outside the country of the currency in which they are denominated. e.g. Eurobonds sold in China.
What are Foreign Bonds?
Bonds issued outside the home country and denominated in the host country’s currency. e.g. “Samurai bonds” are dollar denominated bonds issued by Japanese borrowers in the US.
What affects the Corporate Bond Yields?
Apart from interest rates, the economic conditions, investors risk appetites and the liquidity factor.
