Cash & Fixed Interest

Question 1

Treasury Bills

Answer 1

Issued by government to
finance daily cash flow

Routinely issued at weekly
auctions

1, 3, and 6-month maturities
(also 12 months but so far, no
12-month bill tenders have
been held)

No interest paid - issued below
par and repaid at par on
maturity

Government backed and highly
liquid

Question 2

Certificates of Deposit

Answer 2

Receipts from banks for
deposits placed with them

Fixed rates of interest and fixed
term (can trade prior to
maturity)

Interest paid at maturity

Interest rate depends on
market rates and bank’s credit
rating

Question 3

Commercial Bills

Answer 3

Short-term negotiable debt
instruments issued by
companies

Issued at discount to maturity
value

Typical maturities of between
30 and 90 days

Unsecured

Reduced liquidity

Question 4

Short term money market funds have a maximum weighted average maturity of?

Answer 4

60 days and a weighted average life of 120 days

Question 5

Standard money market funds have a maximum weighted average maturity of ?

Answer 5

6 months and a weighted average life of 12 months

Question 6

Cum dividend

Answer 6

Purchases receives full 6 months interest ( but pays accrued interest up to settlement date to seller )

Question 7

Ex-dividend

Answer 7

Where seller receives 6 months interest (but price adjusted to reflect this)

Question 8

Dirty price is?

Answer 8

Clean price +/- interest adjustment

Question 9

Interest yield

Answer 9

Coupon/clean price x 100

Question 10

Redemption yield

Answer 10

Interest yield +/- gain or loss at maturity / number of years to maturity

——————————————

Clean price x 100

Question 11

Normal yield curve

Answer 11

Rising positive curve, higher

yields for longer terms

Question 12

Flat yield curve

Answer 12

Income similar for long and
short term

If economic factors are stable
and no radical changes to
expected inflation or interest
rates

Question 13

Inverted/Reverse Yield Curve

Answer 13

Yields on longer-term bonds
Caused by supply and demand
or when investors expect short-
term falls to interest rates and
lower long-term rates

Question 14

Secured bonds

Answer 14

Charge on certain assets of the company

Question 15

Unsecured bonds

Answer 15

Higher yield due to higher risk

Holders rank alongside other creditors in liquidation

Question 16

Debentures

Answer 16

Written acknowledgement of debt
Established by trust deed
Fixed - charged over specific asset
Floating - general charge over company asset

Question 17

Convetible loan stock

Answer 17

Offers holders the option of converting to ordinary shares

Conversion dates and rates are specified.

In the event of conversion CGT is chargeable.

Question 18

Floating Rate Notes

Answer 18

Bonds which pay rate of interest linked to money market rate such as SONIA

Interest rate may be set as the average of SONIA over a 6-month period expressed as basis points
above SONIA, e.g., SONIA plus 50 basis points = extra 0.5%

Interest normally paid half yearly or quarterly

Question 19

Index linked gilts

Answer 19

Interest and capital repayment adjusted with inflation (using PI although you should note that
PI will be aligned with CPIH from 2030)

Lower yields than conventional stock

Profits on disposal are CGT exempt but interest is taxable

Question 20

Repo market

Answer 20

Sale and repurchase agreement

One party agrees to sell gilts to another party

With a formal agreement to repurchase equivalent securities at an agreed price on a specified
future date

Transfer of assets - but operates as form of short-term lending

Bank of England uses repo market to influence interest rates

Question 21

Strips Market

Answer 21

Separating conventional gilts into interest (coupon) and redemption payments

Which are then traded in their own right

A 5-year gilt can be stripped to make 11 separate securities (5x 2 coupon payments + 1 redemption payment = 11)

Question 22

Annual rate of interest formula

Answer 22

(1+r/n) to power of n - 1 x 100