Chapter 4 - Bonds

Question 1

What are the two main types of bonds

Answer 1

Corporate bonds - issued by large corporate companies
Government bonds - issued by the government

Question 2

why are bonds raised? and why do investors purchase bonds?

Answer 2

Bonds are raised to raise funds without the need to borrow money from the bank.
Investors lend these fund for the promise to have the loan repaid on a fixed date, and a series of interest payments.

Question 3

What are bonds also referred to as?

Answer 3

Loan stock, Debt, Fixed-income security (if fixed income is paid)

Question 4

what distinguishes a bond from other loans?

Answer 4

They are tradable - investors can buy and sell bonds without the need to refer to the original borrower. They can be sold on the secondary market to other investors

Question 5

what is the important terminology needed for bonds?

Answer 5

Nominal - amount of stock purchase,, interest will be paid on this number
Stock - the type of stock
coupon - nominal interest rate payable on stock
redemption date - the year the stock will be paid back
price - quote prices per nominal of stock
value - calculated by taking the price per £100 nominal value and scaling up based on the total nominal value

Question 6

why are government bonds raised?

Answer 6

• Finance their spending and investment plans
• issuance of bonds is high when tax revenue is low to spending

Question 7

What are UK government bonds called?

Answer 7

Gilts
- these bonds are issued on behalf of the government by the debt management office (DMO)

Question 8

What are the two main types of government bonds and their features?

Answer 8

Conventional
- investments that carry a fixed coupon rate and a single repayment date
- These bonds are stable and predictable for investors
- conventional bonds are stripped into individual cash flows, the coupon payment and the interest payment. “stripping” is the process of breaking down the cash-flow

Index-linked
- interest payments are adjusted
- inflation protection (price rises as inflation does), attractive for long term investors

Question 9

what is the other type of government bonds?

Answer 9

Dual-dated
- carry a fixed-coupon rate but show two dates between which they can be paid. the decision when they are repaid depends on government
Green Bonds
- raises capital for projects that have contributed to environmental
Blue bonds
- raises capital for aquatic suitability/suitability of the ocean

Question 10

what are the names for longer-term debt and shorter-term debt

Answer 10

Longer-term
- corporate bonds - the maturity date should be more than 12 months
Shorter-term
- commercial paper (CP) used for shorter maturity
ONLY COMPANIES WITH HIGH CREDIT RATING CAN ISSUE BONDS WITH MATURITY GREATER THAN 10 YEARS.

Question 11

What does bond security mean and how can it take form and the different types?

Answer 11

Bond security= some form of charge over the issuers assets
This can take form by a third-party guarantee, the bank for example, who would have to repay the money if the issuers default.

fixed-security = specific assets (buildings) of a company are charged as a security for the loan
Floating security = general assets of the company are offered for loan, stock or cash

Question 11

What does a call provision mean?

what’s is a sinking fund requirement

Answer 11

A call provision gives an issuer the option to buy back all of part of the issue before maturity. This is good for the issuer because they can replace the bond with a lower interest one. But investors will demand a higher yield as compensation.

If there is a requirement for the issuer to redeem a specified amount at regular intervals, this is known as sinking fund requirement

Question 12

What is a put provision

Answer 12

Known as “Puttable bonds”. These give rights to bondholders to require the issuer to redeem early. This makes bonds attractive to investors. Increases issuers risk because they will have to refinance a bond at inconvenient times.

Question 13

TYPES OF CORPORATE BONDS - Medium-term notes

Answer 13

standard corporate bonds with a maturity up to five years. They differ from other debt instruments because they are offered to investors continually over a period of time by an agent of the issuer.

Question 14

fixed-rate bonds

Answer 14

These have a fixed rate coupon which are paid early half-yearly or annually and have predetermined redemption dates.

Question 15

Floating-rate notes

Answer 15

these have variable coupon rates. The rate of interest will be linked to a benchmark rate.

Question 16

What does SONIA mean

Answer 16

sterling overnight index average. is the rate of interest at which banks will lend to each other in London, also often used for a basis for financial instrument cash flows.

Question 17

Permanent interest-Bearing shares

Answer 17

They carry fixed coupons and are irredeemable. Issued by building societies

Question 18

Hybrid bonds, the convertible type

Answer 18

Financial instrument that has characteristics of both equity and bonds.
The types are:

convertible bonds (issued by companies), provides investors with possible choices either:
-collect the interest and get the loan back at redemption date
-convert the bonds into ordinary shares
this means that investors can benefit of increasing share prices, they can retain the bond and get ranked above existing shareholders

Question 19

Hybrid bonds - Preferred bonds

Answer 19

Has the potential to offer investors higher yields. These pay dividends as opposed to coupons

Question 20

zero-coupon bonds

Answer 20

Bonds that pay no interest. But they are issued at a discount to their par value and they repay at their par value

Question 21

Domestic bonds and foreign bonds

Answer 21

Domestic bonds - issued in domestic country, UK, Sterling, UK investor
Forgien - issued by an overseas entity in a domestic market

Question 22

Eurobonds

Answer 22

denominated in a currency (any currency other than USD) different from the financial centre which they are issued.
Advantages
- ability to reach lenders internationally
- lower funding costs
- less regulations

Question 23

Asset-backed securities

Answer 23

Financial instruments that pool assets together and distribute the income to investors in form of interest. The largest market is Morgate-backed securities. Creating a bond this way is called secularization. ABS rely solely on the asset pool for repayments

Question 24

Covered bonds

Answer 24

These are also pool of assets batched together. but the pool of assets provide “cover” to investors. The differences to asset-backed bonds are:
- remain on issuers balance sheet
- must provide collateral to investors
- bondholders claim priority