Chapter 4 Bonds Flashcards
Put simply, what is a bond?
A bond is a loan, commonly also known as a loan stock.
What is the ‘coupon’ on a bond
The nominal interest rate that is payable.
What is the ‘nominal’ on a bond
The amount of stock purchased / also known as the par or face value.
What is the redemption date on a bond
The year which the stock will be repaid, repaid at the same time as the final interest payment.
What is the convention for quoting in the bonds market.
That prices are quoted per £100 nominal of stock. E.g. £10,070.00 would be quoted at £100.70
What are the two-types of UK Government bonds.
Conventional bonds and index-linked bonds.
Who issues UK Gov’t Bonds
The debt management office (DMO)
What are UK Gov’t Bonds known as?
Gilts or Gilt-edged stock.
What is a Conventional Govt Bond?
Gov’t bonds that carry a fixed coupon and a single repayment date.
What is an Index-Linked bond?
A bond where the coupon and redemption amounts are increased by inflation over it’s lifetime.
Where are corporate bonds listed / where are they mostly traded?
They are listed on Stock Exchanges / mostly traded Over the Counter.
What is a redemption provision?
When the corporate bond issuer can recall the bond before maturity / disadvantageous to the investor.
What are Medium-Term Notes (MTNs)
Medium-term notes are standard corporate bonds with maturities up to 5 years, but can go up to 30 years due to instruments.
What are the two (UK/US) interest rate benchmarks that relate to Floating-Rate Notes (FRNs)
Sterling Overnight Index Average (SONIA) and Secured Overnight Reference Rate (SOFR)
What are PIBS?
Permanent Interest-Bearing Shares. specific to the UK £ Market, issued by building societies they carry fixe coupons and are irredeemable.
What is ZCB?
Zero-Coupon bond, no interest rate but can be bought at discount for returns.
What is an asset-backed security? (ABSs)
A large group of bonds that are bundled securities.
What are the advantages of bonds?
Regular and Certain flow of income
A fixed maturity date
Income yields that suit different investment and tax situations
Relative security of capital for highly rated bonds
What are the disadvantages of bonds?
The real vale of the income flow is eroded by the effects on inflation
They carry a lot of risks
What are the risks of bonds?
Corporate bonds can default
Gov’t turmoil in markets (e.g. Greece) can mean defaults
Interest rate movement
Early Redemption
Inflation Risk
FX Risk
What are ratings / ratings agencies?
From triple AAA, AA, A, BBB, BB, B, CCC, CC, C, D. (Moody’s Aaa, Baa, Caa) (S&P’s go from CC to D)
Name three ratings agencies
Moody’s, Standard & Poor’s and Fitch Ratings.
How is a bond’s flat yield calculated?
A bond’s flat yield is calculated by taking the annual coupon and dividing it by the bond’s current market price, expressed as a percentage. 4.8 divided by 102.5 x 100
