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IMC Unit 2 > Chapter Six > Flashcards

Chapter Six Flashcards

1
Q

Do UK treasury bills pay interest?

A
  1. They pay no interest and are issued at a discount
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2
Q

Maturity of treasury bills?

A

They are short-term, less than one year

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3
Q

Why are treasury bills issued?

A

To manage the amount of cash in the banking system and are considered to be default risk free

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4
Q

How is the annualised yield on a t-bill calculated?

A

Using a 365 day count convention

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5
Q

What is true about an open repo?

A

Has no predetermined date for the repurchase element

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6
Q

How does BofE conduct interest rate policy?

A

Through its repo operations

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7
Q

Who issues a cerificate of deposit?

A

Can only be issued by institutions with a UK banking licence therefore carrying limited credit risk

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8
Q

Credit risk of CD?

A

With the issuing bank

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9
Q

What is a CD?

A

Certificate of deposit

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10
Q

In the UK, are CDs given deposit guarantees

A

No

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11
Q

Are CPs normally unsecured?

A

Yes

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12
Q

Can CDs have a term above one year?

A

Yes

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13
Q

What is SONIA?

A

Sterling Overnight Index Average. It is the preferred sterling risk-free rate benchmark in bond, loan and derivatives markets

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14
Q

What will SONIA include?

A

Overnight unsecured transactions which will be negotiated bilaterally as well as those arranged via brokers

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15
Q

How is SONIA calculated?

A

By the BoE however it is set by the banks involved in the transaction

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16
Q

A security which preserves the value of its purchasing power over time, despite increases in the general price level is known as?

A

An inflation hedge, as inflation is a measure of the purchasing power

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17
Q

Do treasury bills trade on a discount basis?

A

Yes

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18
Q

What is the minimum deposit for a certificate of deposit?

A

Normally 100k

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19
Q

What is likely to trade at a premium?

A

CDs. Treasure bills and commercial paper do not pay interest but give a return by trading at a discount.

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20
Q

What is true about FRN?

A

FRN coupons reset to market rates regularly and hence trade close to par

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21
Q

In a repo, is the interest charge higher than other sources of borrowing?

A

No it is only accepted by an eligible bank

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22
Q

Does a CP typically have a maturity up to five years?

A

No, typically less than 12 months

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23
Q

Does the quoted annualised yield on a treasury bill always exceed the true compounded annualised return?

A

No, the compound yield exceeds to quoted yield as it compounds the return rather than pro rating

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24
Q

How are CDs issued?

A

In demoninations of 10,000

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25
Q

What are FRN coupons linked to?

A

Money market rates

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26
Q

What is the minimum block size for treasury bills?

A

25k

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27
Q

Is the income on FRN guaranteed?

A

No it varies

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28
Q

Is a repo unsecured?

A

No it is a secured debt

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29
Q

Is the buyer of a repo more concerned about the credit worthiness of the borrower than the quality of the securities used in the repo?

A

The quality of the repod securities is of prime importance

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30
Q

What is the most likely reason for investing in commercial paper?

A

Capital gain

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31
Q

What is commercial paper?

A

A short-term instrument issued by a company with no security attached to it and with no interest

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32
Q

How does commercial paper create a rate of return?

A

It is issued as a discount to its par value and hence an investor will experience an increase in value

33
Q

What is true about floating rate notes (FRNs)?

A

They pay a variable coupon and as a result trade near par. They are generally long term despite trading as money market instruments

34
Q

As interest rates fall, what is true of FRN?

A

The price will remain constant and the yield will fall

35
Q

When is a 2028-2030 treasury repayable?

A

The bond is repayable at a time selected by the DMO between 2028 and 2030 though it must be redeemed by 2030 at the latest

36
Q

If a coupon rate on a bond increases, the duration of the bond will?

A

Lower coupon bonds are more sensitive to interest rate changes than higher coupon bonds and therefore have higher durations

37
Q

High inflation reduces institutional demand for?

A

Non-indexed linked gilts. ILGs, equity and property are real returning assets that are protected from inflation which is important to investors with long term investment horizons

38
Q

What is the market value of a fixed rate irredeemable bond?

A

Coupon rate divided by yield

39
Q

What coupon is most sensitive to interest rate changes?

A

Low coupon long dated stock are the most sensitive to interest rate changes

40
Q

Which is the normal style of coupon payment for gilts?

A

Semi-annually gross

41
Q

Are Eurobonds registered securities?

A

No

42
Q

Are Eurobonds international bond issues underwritten by a syndicate of banks

A

Yes

43
Q

What regulates the Eurobond markets

A

ICMA - International Capital Market Association

44
Q

Are interest of Eurobonds paid without any tax being deducted?

A

Yes

45
Q

Which of the following yield calculations for a gilt would be most useful for a higher rate taxpayer?

A

Net redemption yield since it takes into account after tax cash flows from coupons

46
Q

Gilt issues categorisation

A

Long: more than 15 years
Medium: 7 to 15 years
Short: Less than 7 years
Ultra short: under three years

47
Q

If interest rates increase, what is true of gilts?

A

Gilt prices have an inverse relationship to changes in interest rates/yields. The sensitivity of a particular bond to yield changes is measured by duration

48
Q

Which yield is most useful to establish the income return on a gilt investment?

A

The flat yield as it only assesses the income return and ignores the capital gain or loss on redemption. It is most appropriate for irredeemable bonds

49
Q

What is the most suitable investment for an investor who believes that interest rates will fall

A

With falling interest rates bond prices will be rising. Low-coupon, long-dated gilts will be most sensitive to this and rise the furthest

50
Q

If a long and short dated gilt both have the same market price, what will happen if interest rates increase

A

The longer dated stock is more volatile and would have the highest duration

51
Q

If a gilt has a maturity and a coupon of 6% and current interest rates are 4% what is true?

A

The DMO will aim to redeem the gilt at the earliest opportunity

52
Q

Can a callable bond be sold to the issuer at any time?

A

A callable bond may be called by the issuer, not sold to the issuer

53
Q

Does senior unsecured debt have a lower risk than subordinated debt?

A

Yes

54
Q

What is a serial note?

A

Where a proportion of the capital is repaid each year

55
Q

What is a sinking fund?

A

Where a proportion of the bonds in issue are redeemed each year

56
Q

Describe index linked gilts

A

The coupon and redemption are linked to the retail price index either three or eight months prior to the date in question.

57
Q

What are ILGs described as?

A

They are described as ‘real’ returning assets as they offer protection against inflation which is why the coupon and redemption are scaled up by the inflationary uplift.

58
Q

What is the correct order for repayment in the event of liquidation?

A

Preference shares, ordinary shares, and then deferred shares.

59
Q

How do warrants fit into the order for repayment?

A

It is possible to have warrants issued to subscribe to new shares in the company which would rank last, after deferred shares

60
Q

How are preference shares deemed?

A

They are deemed to be cumulative in terms of their dividend entitlements however some are deemed as non-cumulative

61
Q

What is the highest junk bond rating?

A

BB+ is the highest. (BB+, BB, BB-)

62
Q

What is the lowest IG bond rating?

A

BBB-

63
Q

What are investment grade and high yield bonds?

A

Bonds rated as BBB- (Baa3) or above are IG, whereas those below are high yield

64
Q

What is convexity?

A

Convexity ensures the actual price always exceeds the modified duration prediction

65
Q

When can a putable bond be sold?

A

At the holder’s option

66
Q

When can a callable bond be redeemed?

A

At the issuer’s option

67
Q

When a convertible be converted

A

At the holder’s option

68
Q

What is true about a bond that is irredeemable?

A

It is a bond that has no maturity or redemption date, i.e. it can never be redeemed and so is valued as a perpetuity

69
Q

Explain convexity

A

It is the difference between actual prices and modified duration predictions. By using a modified duration, we are assuming a linear relationship

70
Q

What is the gross redemption yield?

A

Assuming no tax is paid

71
Q

What type of bond would rise to the greatest extent for a given fall in interest rates?

A

Low coupon, long dated

72
Q

Cumulative preference shares, ordinary shares, deferred shares and convertible bonds in order

A

Bonds, preference shares, ordinary shares, deferred shares

73
Q

What is the lowest IG bond rating?

A

BBB-

74
Q

What is the inverted yield curve?

A

Short-term rates are high but the market anticipates that this can’t last for long so short-term interest rates are expected to fall

75
Q

What is the zero-coupon rate?

A

The spot rate

76
Q

What is a droplock FRN?

A

A minimum value for the coupon rate is set so if it falls below this value then the issue is converted into a bond issue for the remainder of its life

77
Q

What is a CoCos?

A

A contingent convertible. It is a form of debt that is converted into equity if a pre-specified trigger event occurs such as the capitalisation falling below a certain level

78
Q

When do CoCos convert?

A

Automatically on the occurence of a trigger event.

IMC Unit 2 (11 decks)

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