Cash & Fixed Interest Flashcards
Treasury Bills
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
Certificates of Deposit
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
Commercial Bills
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
Short term money market funds have a maximum weighted average maturity of?
60 days and a weighted average life of 120 days
Standard money market funds have a maximum weighted average maturity of ?
6 months and a weighted average life of 12 months
Cum dividend
Purchases receives full 6 months interest ( but pays accrued interest up to settlement date to seller )
Ex-dividend
Where seller receives 6 months interest (but price adjusted to reflect this)
Dirty price is?
Clean price +/- interest adjustment
Interest yield
Coupon/clean price x 100
Redemption yield
Interest yield +/- gain or loss at maturity / number of years to maturity
——————————————
Clean price x 100
Normal yield curve
Rising positive curve, higher
yields for longer terms
Flat yield curve
Income similar for long and
short term
If economic factors are stable
and no radical changes to
expected inflation or interest
rates
Inverted/Reverse Yield Curve
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
Secured bonds
Charge on certain assets of the company
Unsecured bonds
Higher yield due to higher risk
Holders rank alongside other creditors in liquidation
Debentures
Written acknowledgement of debt
Established by trust deed
Fixed - charged over specific asset
Floating - general charge over company asset
Convetible loan stock
Offers holders the option of converting to ordinary shares
Conversion dates and rates are specified.
In the event of conversion CGT is chargeable.
Floating Rate Notes
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
Index linked gilts
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
Repo market
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
Strips Market
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)
Annual rate of interest formula
(1+r/n) to power of n - 1 x 100
