Chapter 6: Debt: Types and Features Flashcards
Difference between a bond and a bill?
- Bonds typically have maturity for longer than a year whereas bills are short-term securities maturing in less than one year
Who issues UK gov gilts and treasury bills and what is the usual method used for this?
- The Debt Management Office (DMO)
- An Auction
Features of gilts
- A name
- An interest rate (coupon)
- A redemption date
What does the quoted coupon of a gilt represent?
- the annual amount of interest paid per £100 nominal value
How often are gilt coupons typically paid?
- Semi-Annually, on fixed days 6 months apart ex. 25th Jan & 25 July
Short, medium and blond conventional gilts time
- Shorts – remaining life < 7 years
- Mediums – remaining life 7 - 15 years
- Longs – remaining life > 15 years
What are Index-Linked Bonds?
- have coupon and redemption values linked to the UK retail price index
- each index-linked payment is related to the RPI three months prior to the months payment –> the investor will know what the next coupon will be due to the lag
2 Unusual features of Floating rate gilts
- Pay variable coupons, set by reference to a predetermined market interest rate at the beginning of each interest payment period
- Pay interest four times a year instead of semi annually
What are STRIPS and who are they carried out by?
- gilts that can be stripped into their coupons and a redemption amount and traded separately
- Carried out by financial institutions
Gilt Repo
A transaction where one party sells gilts to another, agreeing at the same time to repurchase the equivalent securities at an agreed price and on an agreed date in the future (repo = re-purchase)
What is the indenture?
The terms and conditions of a bond
What does a fixed charge bond mean?
It is secured against specific company assets ex. a building
* Mortgage bonds
Loan Stock
- Unsecured corporate debt securities
Debentures
- A bond that is a floating charge over assets secured against a ‘class’ of assets, ex. machinery or fixtures
Collateralized debt obligations (CDOs)
- secured by cash flow from a pool of bonds, loans and other assets
- asset backed security
- repackage the bonds, enabling the issuing company to create a separate legal entity from the original owner of the underlying assets, leaving them unaffected by any bankruptcy risk in the original owner
Conversion value calculation
Current share price x conversion ratio
Calculate the theoretical price of a convertible bond
- done by comparing a similar bond and an American call option with the same strike and expiry date, taking into account the dilution effect of the calculation
- Convertible price = Straight bond + ((Option premium/1 + Dilution) x Conversion ratio)
Contingent convertible bonds (CoCos)
- bonds that are converted into shares automatically is a trigger is met
- mechanical trigger = based on bank’s capital ratio, if falls below a set level, will trigger a conversion to prevent the bank becoming insolvent
- discretionary trigger = based on a regulator’s opinion of a bank’s solvency
- a market event is also a trigger
What are call provisions for bonds?
- allows the issuer of the bond to pay off the obligations of the bond early, before maturity
- typically used by issuers when interest rates fall as they can re-issue the bond at lower coupon costs
What are put provisions for bonds?
- allows the holder of the bond to force the issuer to redeem early
Order of repayment
- all classes of debt rang more highly than equity
- senior debt is the priority
