Chapter 2 - Bonds Flashcards
What inflation measure is used for indexed linked gilts and indexed linked corporate bonds?
Indexed linked gilts, RPI is used
Indexed linked corporate bonds, CPI is used
What does STRIP’s stand for, and what are they?
Separate Trading of Registered Interest and Principal. And they involve separating out each of the cash flows of a bond (coupon and maturity payments) and trading these independently of each other.
What is a credit spread?
The additional yield an investor demands for buying a corporate bond as opposed to a similar gov bond
What is the formula for modified duration?
Macauley duration/(1 + GRY)
Give an example of a secured and unsecured debt
Secured = Debenture
Unsecured = Loan stock
Why are zero coupon bonds advantageous to private investors?
The return is provided in the form of capital growth, rather than income
STRIP’s are subject to what kind of tax(es)?
Income tax only
How are gilts traded and settled?
Gilts are traded at the clean price and settled at the dirty price
When a building society has demutualised, PIBS (permanent interest bearing securities) are reclassified as what?
Perpetual Subordinated Bonds (PSB’s)
What is the indexation lag in bonds (in months)?
All index-linked gilts issued prior to 2005 have an eight-month indexation lag, while any issued from 2005 onwards use a three-month indexation lag.
Main difference between treasury bills and treasury bonds
Treasury bills have short-term maturities and pay interest at maturity.
Treasury bonds have long maturities and pay interest every 6 months.
Are onshore or offshore bonds better for higher and additional rate tax payers?
For higher and additional tax payers, onshore are better… as their gains are only charged at 20 & 25% respectively. As opposed to 40 & 45% for offshore bonds
