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International Introduction to Investment > Bonds > Flashcards

Bonds Flashcards

1
Q

Why does an investor lend money?

A

In return to have repaid on a fixed date and a series of interest payment.

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2
Q

What are bonds also known as?

A

Loan stock, debt or fixed-interest securities.

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3
Q

What is the main difference between a bond and a loan?

A

A bond is trade-able.

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4
Q

What is the nominal of a bond?

A

The amount of stock purchased on which interest will be paid.

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5
Q

What are US gov bonds called?

A

Treasuries.

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6
Q

What is the coupon of a bond?

A

The amount of interest paid per year expressed as a % of the face value.

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7
Q

What is redemption date also known as?

A

The Maturity date.

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8
Q

How much is the price of stock usually quoted as?

A

$100

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9
Q

How do you calculate the value of stock?

A

Multiply the nominal amount by the current price.

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10
Q

What are the advantages of bonds?

A

Regular flow of income, fixed maturity, range of income yields and security of capital for highly rated bonds.

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11
Q

What are the 2 disadvantages of bonds?

A

The value can be eroded by inflation and they carry risks.

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12
Q

What are the 2 main types of risk that bonds carry?

A

Price risk and default risk.

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13
Q

What type of relationship is there between bond prices and interest rates?

A

Inverted.

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14
Q

If interest rates increase, bond prices will….

A

Decrease.

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15
Q

If interest rates decrease, bond prices will….

A

Increase.

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16
Q

What is the seniority risk of bonds?

A

That corporate debt is ranked higher in the event of liquidation.

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17
Q

Name the 3 main credit rating agencies?

A

S&Ps, Moodys and Fitch Ratings.

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18
Q

What does S&P stand for?

A

Standard and Poors.

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19
Q

What is the highest rating Moodys gives?

A

Aaa.

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20
Q

What is the highest rating S&P gives?

A

AAA.

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21
Q

What grades constitute investment grade?

A

Baa, BBB and BBB or above.

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22
Q

What grades are non-investment grade?

A

Ba, BB and BB or below.

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23
Q

What ratings are given if a company will default.

A

C, D and D.

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24
Q

How does S&P show ratings in a relative category?

A

With a + or -.

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25
Q

How does Moody’s show ratings in a relative category?

A

With a 1, 2 or 3.

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26
Q

What are non-investment grades bonds also known as?

A

High yield, speculative or junk.

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27
Q

Why would governments issue bonds?

A

To finance spending and to bridge the gap between spending and income.

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28
Q

When is the issuance of government bonds higher?

A

When revenue from tax is low.

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29
Q

What are the 4 types of US government bonds?

A

Treasury Bills, Treasury Bonds, Treasury Notes and TIPS.

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30
Q

What does TIPS stand for?

A

Treasury Inflation Protected Securities.

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31
Q

What are TIPS?

A

Index-linked bonds, which are based on movements in the CPI.

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32
Q

How is the interest paid on TIPS?

A

Half-yearly with the coupon being paid on the changing principal amount.

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33
Q

What are the characteristics of a treasury bill?

A

Used for short term borrowing needs, maturity of less than a year, typically 28, 91 and 128 days, ZCB and issued at a discount.

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34
Q

What are the maturity characteristics of a treasury bond?

A

Maturity of more than 1 years, typically 30 years?

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35
Q

What are the characteristics of a treasury note?

A

Fixed coupon and redemption date, maturity of between 1 and 10 years, typically 2, 5 and 10 years.

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36
Q

What does STRIPS mean?

A

Separate Trading of Registered Interest and Principal Securities.

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37
Q

What are STRIPS?

A

Where a bond is broken down into its underlying cash flows and traded individually as ZCBs.

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38
Q

When does settlement take place for US Treasuries?

A

The next day.

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39
Q

In what form are US Treasuries settled?

A

Book entry form.

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40
Q

Who issues US Treasuries?

A

Federal agencies and municipal agencies.

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41
Q

What do Freddie Mac and Fannie Mae do?

A

Issue bonds to support house purchase activities.

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42
Q

What are gilts?

A

UK governments bonds.

43
Q

Who issues gilts?

A

The Debt Management Office.

44
Q

What does DMO stand for?

A

The Debt Management Office.

45
Q

What is the time frame for an ultra short gilt?

A

0-3 years.

46
Q

What is the time frame for a short gilt?

A

3-7 years.

47
Q

What is the time frame for a medium gilt?

A

7-15 years.

48
Q

What is the time frame for a long gilt?

A

15+ years.

49
Q

What is the time frame for an ultra long gilt?

A

50+ years.

50
Q

How are gilts settled?

A

Next day and electronically.

51
Q

What are the names for German government bonds?

A

Bunds, Schatz and Bobls.

52
Q

Which type of German bond is long term?

A

Bunds.

53
Q

Which type of German bond mature after 2 years?

A

Schatz.

54
Q

Which type of German bond mature after 5 years?

A

Bobls.

55
Q

Which bond type sets the benchmark for other European government bonds?

A

Bunds.

56
Q

When do domestic German bonds settle?

A

2 business days after trade date.

57
Q

When do international German bonds settle?

A

T+2.

58
Q

When is interest paid on German gov bonds?

A

Annually.

59
Q

What are the 2 types of French gov bonds?

A

BTANS and OATS.

60
Q

Which French gov bond is issued for up to 5 years?

A

BTANS.

61
Q

Which French gov bond is long term?

A

OATS.

62
Q

When do OATS settle?

A

T+2.

63
Q

When do BTANS settle?

A

Domestic T+1 and international T+2.

64
Q

What are Japanese gov bonds called?

A

JGBs.

65
Q

What are the 6 categories of Japanese gov bonds called?

A

Short, Medium, Long, Super long, Individual investor and inflation indexed.

66
Q

What is the maturity term for retail Japanese bonds?

A

3, 5 and 10 years.

67
Q

What are Japanese inflation indexed bonds similar to?

A

TIPS.

68
Q

What is the settlement for Japanese bonds?

A

T+1 for JGBc and T+2 for corporate bonds.

69
Q

What method is used to sell gilts?

A

Auction.

70
Q

Who issues US gov bonds?

A

Bureau of the Fiscal Service.

71
Q

Who issues German gov bonds?

A

Finan Gmbh.

72
Q

Who issues French gov bonds?

A

Agence France Tesor.

73
Q

Who issues Japanese gov bonds?

A

Ministry of Finance.

74
Q

What does security on a bond mean?

A

That the bond has some sort of charge over the Issuers assets.

75
Q

What does a fixed security mean?

A

That the bond is secured against specific assets eg. a building.

76
Q

What does a floating security mean?

A

That the bond is secured over the general assets of the Issuer eg. cash.

77
Q

What is a call provision?

A

Something that allows the issuer an option to buy back all or part of the issue before maturity.

78
Q

What is a sinking fund requirement?

A

Where the issuer can redeem a specific amount of the issue in regular intervals.

79
Q

What is a put provision?

A

Where a bondholder can require the issuer to redeem early on a set date or in between dates.

80
Q

What does MTN stand for ?

A

Medium Term Notes.

81
Q

What is a fixed rate bond?

A

A bond with a fixed coupon that is paid yearly or half yearly and has a set maturity date.

82
Q

What is a floating rate bond?

A

A bond with variable rates of interest.

83
Q

What does LIBOR stand for?

A

London Interbank Office Rate.

84
Q

What is the LIBOR?

A

The rate at which banks will lend to each other in London.

85
Q

What is a convertible bond?

A

A bond that allows the investor to convert the bond into ordinary shares before maturity.

86
Q

What does ZCB stand for?

A

Zero Coupon Bond.

87
Q

What is a ZCB?

A

A bond that pays no interest but is issued at discount.

88
Q

What types of assets would be bundled in a securitisation?

A

Mortages, credit card debt and accounts receivable.

89
Q

What are the benefits of a securitarisation for a bank?

A

Available funding increases, mortages/debt are removed from the balance sheet and its liquidity position is helped.

90
Q

What are the benefits of a securitarisation for an investor?

A

The instrument is marketable and asset backed and they have security.

91
Q

What is the main advantage of a securitarisation?

A

That they can pool together assets that would not be easily traded in their original form.

92
Q

What characterizes a domestic bond?

A

A domestic issuer issuing into a domestic market.

93
Q

What characterizes a foreign bond?

A

An overseas entity issuing into a domestic market in domestic currency.

94
Q

What were Eurobonds initially created for?

A

In the 1970s to accommodate US Dollar revenues from Middle East oil and sales.

95
Q

What characterizes a Eurobond?

A

A bond that i denominated in a currency different from the financial center where they are issued.

96
Q

Are most Eurobonds rated?

A

Yes.

97
Q

What can an issuer do to prevent bondholders being subordinated to subsequent issues.

A

They can make a negative pledge clause.

98
Q

What does a negative pledge clause do?

A

Prevents a company from making any further secured bond issues.

99
Q

What are the advantages of a Eurobond market compared to a domestic market?

A

Tap into potential investors internationally, anonymity as in bearer form and less regulation and disclosure.

100
Q

What types of Eurobonds are there?

A

Straights, ZCB, FRN, convertibles and dual-currency.

101
Q

What are bond yields the measure of?

A

The returns to be earned on bonds.

102
Q

What is the flat/running yield?

A

The interest paid on a bond as a percentage of its market price.

103
Q

How do you calculate the flat yield of a bond?

A

Annual coupon / bond price X 100.

104
Q

What does the yield curve do?

A

Shows the different rates of interest for debt instruments with different maturity dates.

International Introduction to Investment (9 decks)

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