Chapter 14: Bond Markets Flashcards

1
Q

“bond”

A

An alternative term for a fixed-interest or index-linked security.

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2
Q

Bonds are described by (2)

A
  • type of organisation issuing the security, ex. government, local authority, corporate
  • nature of the bond - fixed interest/index-linked
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3
Q

“gilts”

A

UK government bonds

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4
Q

Fixed-interest / conventional bond

A

Gives an income stream and final redemption proceeds that are fixed in monetary terms

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5
Q

Index-linked bond

A

Gives an income stream and final redemption proceeds that are linked to an inflation index.

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6
Q

3 Types of bond markets

A
  • government bonds
  • corporate bonds
  • overseas government and corporate bonds
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7
Q

7 Investment and risk characteristics of conventional government bonds.

A
  • very good security (if politically stable)
  • yield (GRY) is fixed in nominal terms
  • lower expected returns than equities over the long term
  • market values can be volatile, especially for longer-term bonds
  • mixture of terms’ short, medium, long, undated
  • low dealing expenses
  • highly marketable
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8
Q

3 Types of corporate bonds

A
  • Debentures
  • Unsecured loan stock
  • Subordinated debt
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9
Q

Risk & investment characteristics of corporate bonds

A
Less:
- secure
- marketable
- liquid
than government bonds.
Consequently, they generally offer a higher yield to investors.
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10
Q

4 Theories put forward to explain the shape of the yield curve

A
  • Expectations theory
  • Liquidity preference theory
  • Inflation risk premium theory
  • Market segmentation theory
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11
Q

Expectations theory

A

Yield reflect future short-term interest rates and inflation

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12
Q

Liquidity preference theory

A

Investors require an additional yield on less liquid (longer-term) bonds.

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13
Q

Inflation risk premium theory

A

Investors require an additional yield on longer-term conventional bonds to compensate for the risk of inflation being higher than anticipated.

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14
Q

Market segmentation theory

A

Yields at each term are determined by supply and demand at that term.
Demand comes principally from institutional investors trying to match liabilities.

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15
Q

Real yield curve

A

Plot of real gross redemption yields on index-linked bonds against term to maturity.

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16
Q

Approximate market expectation of future inflation

A

Difference between the conventional yield curve and the real yield curve.