Chapter 5 - Bonds Flashcards
What are the 4 main types of government bond issued by the DMO?
Conventional - fixed coupon, single repayment dateDual dated - fixed coupon, issuer can pay out bond between two datesIndex-linked - coupon and redemption increase annually by the rate of inflation Irredeemable - no fixed date (perpetual or undated)
What is a gilt STRIP?
Separate Trading of Registered Interest and PrincipleThis is breaking down the gilt into its individual cash flows (separate out the nominal and coupons into zero-coupon bonds)The action of stripping is done by HM Treasury, BoE and GEMMs (Gilt Edged Market Makers)Since the coupons are paid semi-annually, a three year part will have 7 cash flows (6 coupons and the face value)
What are the 3 gilt types in terms of maturity?
Short (0-7 years until redemption)Medium (7-15 years inclusive until redemption)Long (15 years plus until redemption)
What’s the difference between bonds and bills?
Bonds > 1 year, bills
How are government bonds issued?
DMO (debt management office who act on behalf of treasury) auction to competitive bidders but set some aside for non-competitive bidders (smaller companies - limit £500k)Competitive bids - DMO accepts highest bid Non-competitive price - average price of successful bidders
Where are corporate bonds listed?
On stock exchanges most are listed however , most are traded in the OTC market
What’s the difference between commercial paper and corporate bonds?
Commercial paper is short term (less than a year)
In terms of security, what are the types of corporate bonds?
1) Loan stock - unsecured debt (highest risk)2) debentures - secured debt, two types:(i) fixed charge over assets - secured against a specific asset (eg. The building). This is the least risky(ii) floating charge over assets - secured against general assets (eg. Cash, stock, etc). A bit more risky than fixed.
In terms of how they are redeemed, what are the types of corporate bonds?
1) fixed rate - normal 2) floating rate - linked to rate (eg. LIBOR)3) zero-coupon - no coupon (no reinvestment risk)4) convertibles - into shares (it will say at issue ‘this can be converted into X stocks’ - it may be a bad deal at first but may change - either change or sell)5) callable - issuer can redeem early6) putable - investor can redeem early7) sinking fund - redeem amounts at intervals
What are PIBS?
Fixed income instruments issued by building societies- fixed coupons that are irredeemable
What is a MTN corporate bond?
Medium term note (9 months to 5 years)
What is a domestic, foreign and international bond (Eurobond)?
Domestic - where company, currency and country of issue match (eg. BT in UK in £)Foreign - where the company is out of place (eg. BT in U.S. in $)Eurobond - where country and currency don’t match (eg. BT in UK in $ or BT in U.S. in €)
What is the flat yield calculation? What else is it known as?
Flat yield = (coupon/market price)*100Note market price is the clean price (dirty price is the clean price + interest gained)Otherwise known as current yield, running yield, income yield, interest yield
What’s is an ABS vs a covered bond?
ABS - securitised pool of assets. The bank sells assets to an SPV (therefore debt is no longer on bank’s balance sheet). The SPV is then sold to an investment company who issues ABS to the market. The bank receives cash for it.Covered bond - similar to ABS but it remains on the bank’s balance sheets
What do is the lowest investment grade bond’s grade in Moody’s scoring vs Standard & Poors vs Fitch?
Fitch and Standard & Poor has the same rating system - BBBMoody’s - Baa
