Book - Chapter 2 ST Questions Flashcards
- An investor bought a holding of £1,000 Treasury 4% Gilt in April 2009 at a clean price of £100.38 plus accrued interest of 0.65361:,. If the bond currently has a clean price of£ 122.16 and a dirty price of £123.63, wha1t gain or loss would they make if they sold the holding today excluding dealing costs and ignoring any tax implications?
A sale today would generate proceeds of £1,236.30.
The cost was £1,000 nominal multiplied by a dirty price of £101 .033615 (clean price of £100.38 plus accrued interest of 0.653615) to give a total cost of £1,010.34.
A gain of £225.96 would be realised.
- For eight months during 2009, RPI was negative. What would have happened to the returns on index-linked bonds that were calculated using those inflation figures?
There is no deflation floor with index-linked gilts so the indexed capital value would have fallen and the coupon payment would have been lower.
- Why would a UK company issue a foreign bond?
A UK company might issue a foreign bond to tap into a source of liquidity to raise the funds it needs but its primary driver would usually be the ability to raise the finance at a lower interest rate.
- An FRN has been issued with a semi-annual coupon of three-year LIBOR plus 240bp. The bond is due to be reset today and LIBOR was fixed at 1.1 %. What would be the amount of the next coupon payable on a nominal holding of £1,000 of stock?
The annual rate would be 1.1 % plus 2.4% which equals 3.5%. The half-yearly coupon would, therefore, be £1,000 x 1.75% = £17.50.
- A company has issued a 5% convertible unsecured loan note that is convertible into the ordinary shares of the company at a rate of 20 shares per £100 nominal. The bond is priced at £125 and the ordinary shares at £6.50. Would it be worth converting the holding?
The bond is valued at £125 and could be converted into 20 ordinary shares worth 6.50 each or £ 130 in total. It would, therefore, be worth considering converting although in practice the impact on income would also be taken into account.
- An investor has a holding of £10,000 ABC 6.25% bond 2035. If its credit rating changed from BB- to B, what would you expect to be the effect on the price and the bond’s yield?
This is a credit downgrade and so you would normally expect the price of the bond to fall and the yield to rise.
- An investor has £100 nominal of a bond that pays a 4% coupon annually and is due to repay in exactly two years’ time. If the required yield is 3%, what will be the price of the bond?
See workbook.
101.91
Which of the following two bonds has the higher flat yield?
A - 4¼% Treasury Gilt 2027 - 127.86
B - 4¾% Treasury Gilt 2030 - 138.84
B - 3.45%
- Which of the following bonds would you expect to demonstrate the greatest volatility?
• 1 % Treasury Gilt 2024.
• 5% Treasury Gilt 2025.
• Treasury Coupon Strip 07June 2024.
• Treasury Coupon Strip 07 December 2055.
Volatility can be summarised as:
- The longer the period to redemption, the more volatile the bond.
- The lower the coupon, the more volatile the bond.
An investor has a holding of a Treasury Gilt, repayable in ten years’ time, and is concerned about what would happen if interest rates rose from their current low level. If the gilt is priced at 122.16 and a 1 % rise in rates, is expected what would you expect to happen to the price if its Macaulay duration was 8.23 years and its GRY 1.52% paid annually?
8.23
________ = 8.11
(1+0.00152)
If yields rise by 1% then the price of the bond should fall to 122.16-(122.16 x 0.0811) = £112.25.
