Characteristics of Bonds Flashcards
Who are the primary issuers of bonds?
1) Corporations
2) FIGs
3) Sovereigns
4) Governments
Who are the primary investors in bonds?
1) Retail Clients
2) Institutions (FIGs, Pension Funds)
3) Central Banks
Name 6 different ways a bond can redeem?
1) Single-Dated
2) Double-Dated
3) Callable
4) Puttable
5) Irredeemable
6) Convertible
Double-dated means the bond can be called between two set dates. Gilts can be issued in this format.
What are the DMO classifications for bond maturities?
Shorts - up to 7 years
Mediums - between 7 & 15
Longs >15yrs
What are the different types of coupons?
1) Fixed (straights)
2) Floating (Linkers)
3) Step-up / down
4) Zeros
What is meant by a bond with no “deflation floor”
A linker who’s final redemption amount can be less than £100.
What is a spread?
the difference between theyield available on one instrument and the yield available on another with similar maturity.
Can also be calculated against benchmarks: SONIA, SOFR etc.
What is a covenant?
A condition that protects a bond holder
The upgrading of debt to have equal quality is known as Pari Passu
What does the covenant: Limiting further debt and priority, do?
- Limits the issuance of further debt with higher priority either by outright prohibiting, or by upgrading existing debt to the new, higher, priority
What does the covenant: Restricting payment of dividends, do?
Excessive dividends can negatively effect a bonds value - by restricting the payment of dividends on a basis of earnings or cash, this can be avoided.
What does the covenant: Restricting sale of assets, do?
To prevent the value of a bond falling due to the issuer selling assets - this covenant can prohibit the sale of assets unless they are reinvested into fixed assets or pay off debt.
What is Sukuk?
Islamic finance compliant bonds e.g. Do not charge Riba
Includes Perpetual and Convertible Sukuk
How does Ijarah work?
1) SPV Setup
2) SPV sell Sukuk to investors
3) SPV purchases asset from company
4) SPV leases asset back to company
5) Lease payments distributed to investors
6) At maturity principal is returned
How does Salam work?
Salam is similar to a future except:
Agreement to deliver a good in future for payment today
Not tradeable, so it is a rare form of financing
What is a green bond?
Green bond:
1) Used to finance “green” projects
2) Higher transaction costs
3) Lack of standardisation
4) Potential for greenwashing
5) Governed by ICMA Green Bond Principles (GBP)
GBP are voluntary process guidelines that recommend transparency and disclosure,
and promote integrity in the development of the green bond market, by clarifying the key components
involved in launching a credible green bond.
What is a sustainability bond?
A bond used to finance green & social projects
- SBG (sustainability bond guidelines)
What is a social bond?
A social bond is a form of funding for social projects
e.g Healthcare or infrastrucure
Governed by ICMA SBP (social bond principles)
What is a sustainability linked bond?
A bond where the issuer has set sustainability targets or objectives to hit
1) Coupon can step up / down
2) Funding can be used for anything
3) Governed by SLBP
What is a blue bond?
Similar to a green bond but the financing is used for “ocean” related projects.
What is a social impact bond?
A social impact bond differs in structure to a normal bond:
Investors receice payouts based upon certain criteria being met
Pay for success financing
In terms of risk, more like equity or a structured product
What are the 5 major influences on a bonds price?
1) Interest Rates
2) Inflation
3) Issuer Specifics (e.g rating)
4) Liquidity
5) FX Rates
What does modified duration show?
The change in price of a bond resulting from a 1% change in yield.
1) Illustrates how bond prices and yields move in opposite direction
What does duration show?
The weighted average of the PV of a bond’s payments, expressed in years.
Effective Maturity of a bond
Longer Duration = more sensitive to interest rate changes
Low (yield & coupon) & Long (maturity) = higher duration
Measure of Risk of holding the bond
What is the repo market and what does it allow?
(Govt Bonds)
A government bond repo is a means of borrowing, using a government bond as a security
Repo markets allow for two way prices to be made in gilts. Brokers / Dealers can quote two way prices as they can borrow bonds temporarily and as such will always be able to deliver the gilts.
Effectively provides liquidity for the market
What are stock borrowing and lending intermediaries?
They pool large blocks of securities from institutional investors.
They then lend these securities out to borrowers looking to cover a short position and split the fee between SBLI and the lender.
There has been minimal activity since 1996 (introduction of the repo market)
How quick do UK Govt Bonds Settle?
T+1 via Crest
Name 6 features of crest:
1) Bank of England Clearing House
2) Allows assets to be held in dematerialised form
3) Clears and settles trades
4) Provides electronic trade confirmation
5) Acts as Custodian
6) Collects SDRT on shares settled electronically.
