Chapter 4: Bonds

Question 1

How does a bond differ from a loan?

Answer 1

It is tradeable - an investor can buy and sell bonds.

Question 2

What does the “nominal” mean

Answer 2

This is the amount of stock purchased, the face value. Not to be confused with the cost of purchase. The amount that will eventually be repaid.

Question 3

How often is bond interest normally paid?

Answer 3

Twice a year.

Question 4

How is the value of a bond calculated?

Answer 4

Taking the price per £100 of nominal and scaling up based on the amount of nominal held.

Question 5

What are index-linked bonds?

Answer 5

Bonds that increase by the amount of inflation.

Question 6

What two cashflows can a conventional bond be stripped into?

Answer 6

Coupon Payments
Bond Repayment

Question 7

What does the coupon mean?

Answer 7

The nominal interest rate payed per year.

Question 8

What is a dual dated bond?

Answer 8

A fixed coupon bond, but the repayment can occur between two specified dates.

Question 9

What term is used for corporate bonds with a short maturity?

Answer 9

Commercial Paper

Question 10

Where is the majority of bond trading taken place?

Answer 10

OTC

Question 11

What can a company offer to guarantee repayment for am investor?

Answer 11

Security

Question 12

What 3 forms can a security take?

Answer 12

1. 3rd party (e.g a bank guarantees)
2. Fixed Security (fixed assets, e.g. real estate)
3. Floating Security (cash and cash eq)

Question 13

Call Provision?

Answer 13

Gives the issuer (company) the option to buy back all or part of the bond before maturity.