Chapter 5 Flashcards
What do we assume the par value of a bond is for exam purposes?
£100
What is the coupon on a bond?
This is the income from the bondH
How do we calculate the bond coupon?
It is given as an annual % of face value
What does it mean that a bond trades above par?
It means that the bond is trading above its par value
What does it mean that a bond trades at a premium?
It means that the bond is trading above its par value
What does it mean that a bond trades below par?
It means that the bond is trading below its par value
What does it mean that a bond trades at a discount?
It means that the bond is trading below its par value
What is the CGT treatment of bonds?
It does not have CGT.
The exemption from capital gains tax extends to options and other contracts to buy or sell gilts.
What can we say about the bond price if its coupon rate is higher than its yield?
We then know that it is trading at a premium
What can we say about the bond price if its coupon rate is lower than its yield?
We then know that it is trading at a discount
What is the budget deficit also known as?
Public sector net cash requirement (PSNCR)
How is the public sector net cash requirement funded?
It is funded through raising bonds (debt)
Who issues gilts?
The Debt Management Office (DMO)
Who is responsible for the DMO?
The treasury
What are the main sources of public sector net cash requirement funding?
Gilts, treasury bills, and NS&I products
For index linked gilts, what is the par value linked to?
The RPI
For index linked gilts, what measurement will it change to in 2030?
It will change to CPIH
When it comes to index linked gilts, how is the coupon payment calculated?
We take the par value, multiply it by the relevant RPI, and then use the normal coupon rate on the inflated par value. This will give us the coupon payment
If inflation is above the break even inflation rate what bonds are preferred?
Index linked bonds
If inflation is below the break even inflation rate, what bonds are preferred?
vanilla bonds
What does the UK MBA sell?
THey sell municipal bonds on the capital markets
What is the UK MBA?
The UKA MBA is the UK Municipal Bonds Agency and they raise debt to fund local activities
Who guarantees UK Municipal Bonds Agency Bonds?
No one
What are the three lending programmes of the UK MBA?
- Pooled loans of at least 1 million for maturities exceeding more than 1 year (not guaranteen by the local municipality)
- Stand alone loans to a single local authority for at least £250m, for maturities exceeding one year (guaranteed by municipality)
- Short-term pooled loans with maturity of less than 1 year (no guarantees)W