Chapter 4 - Bonds Flashcards
What is a Bond?
Simply a loan.
With a bond, an investor lends in return for the promise to have the loan repaid on a fixed date plus (usually) a series of interest payments. Bonds are commonly referred to as loan stock, debt or (in the case of those that pay fixed income) fixed interest securities.
Who issues Government bonds?
- National Government
- Supranational Agencies
- World Bank
Supranational Agencies examples: European Investment Bank, IMF, World Tr
Who can issue a Corporate bonds?
- Large Corportate Listed Companies
- Large Banks
What makes a bond different from most loans?
It is tradable
What is the Nominal of a Bond?
Also known as par or face value or principal of the bond.
The amount of stock purchased. This will be what the interest payment will be based on.
The nominal is not be confused with the amount
invested or the cost of purchase
What is Stock in relation to a Bond?
The name given to identify it.
What is Coupon Rate?
- The nominal interest rate payable on the stock.
- Rate is quoted gross
- Typically pays out equall every half year.
What is the Redemption Date in relation to Bonds?
Also known as Maturity Date
- The year the stock will be repaid.
- The amount repaid will be the nominal amount of stock held
- Repayment will take place at the same time as the final interest payment3.
Repayment will take place at the same time as the final interest payment
In the bond market, what price per nominal is it based on?
£100
Nominal = £10,000
The convention in the bond markets is to quote prices per £100 nominal of stock. So, in this
example, the price is £100.70 for each £100 nominal of stock.
How do you calculate the value of a bond?
price per £100 nominal of stock and scaling up based on the total nominal value held.
Example, the total nominal value is £10,000 and the price per £100
nominal value is £100.70. The total value is, therefore, £10,070.00, calculated as: (£10,000/£100) x
£100.70 = £10,070.00.
What are Gilts?
UK Government Bonds
What are UK Government Bonds called?
Gilts
Who issues Gilts on behalf of the UK Government
The bonds are
issued on behalf of the government by :
- The Debt Management Office (DMO)
- An executive agency of HM Treasury.
What are the two main types of UK Government Bonds
- Conventional Bonds
- Index-Linked Bonds
What are Conventional UK Government Bonds?
Conventional government bonds are instruments that carry a fixed coupon and a single repayment
date.
What are Index-Linked UK Government Bonds?
The coupon and redemption amount for index-linked bonds are increased by the amount of inflation
over its lifetime by linking the payments to some inflation indicator, such as the Consumer Price Index (CPI) or Retail Price Index (RPI).
What main UK Government bond type is favourable in times of uncertain inflation?
Index-linked bonds
- Provides more protection to the investor.
- Long-term investors need to invest their funds and know that the returns will
maintain their real value after inflation so that they can meet their obligations to pay pensions.
What does stripping a Gilt mean?
When a conventional gilt bond is “stripped,” breaking it down into its individual cash flows which can be traded separately as zero coupon gilts.
Th
What are gilt STRIPs?
A conventional gilt bond that has been stripped into its individual cash flows and sold seperately as zero coupon gilts
What is the name of a bond that is issued by a company of a maturity date over 12 months
Corporate Bond
What is the a bond that is issued by a company that has a maturity date less than 12 months typically reffered as?
Commercial Paper
What is a call provision in a corporate bond
A right that give the issuer the option to buy back all or part of the issue before maturity
What requirement does a company need to issue bonds of over 10 years at an acceptable cost?
- High Credit Rating
Where are Corporate Bonds traded?
Trading mainly occurs Over the Counter (OTC) in developed markets (that is directly between market counterparties) but are also tradable on stock exchanges.
Most are listed on stock exchanges
What is Bond Security?
(Corporate Bonds)
When a company issues bonds and is obliged to offer protection to the investor that gurantees some repayment of the bond if the company defaults.
This can secured through the issuers assets or a third party guarantree e.g. a bank that agrees to pay the investors if the company defaults.
Bondholders have seniority before other creditors on these assets.
The greater the security offered, the lower the cost of borrowing should be