Fixed Income Flashcards
What is a money market instrument?
Fixed income security that does not pay a coupon and has a maturity of less than one year.
Who issues the UK treasury Bill?
UK government
what are other money market instruments?
Interbank deposits, certificates of deposits and commercial paper
what are floating rate notes also known as?
Variable bonds.
what level are variable bonds issued at and what is their coupon?
Issued at par but have a coupon linked to a pre specified market rate.coupon is recalculated at regular intervals (3-6 months) throughout life of issue.
what is UK’s largest fixed income market?
UK gilt market for UK government bonds.
what are index linked gilts?
Gilts that have a coupon and redemption value Linked to retail prices index and they offer a real return to investors.
What are the characteristics of corporate bonds?
Issued by corporations, characteristics are specified in the bond indenture which accompanies each corporate band issued and include sinking fund provisions, protective covenants and put or call provisions.
What are secured bonds secured against?
Against collateral including mortgages.
What are the features of zero coupon bonds?
Issued at a discount and do not pay a coupon.
What are international bonds called?
Eurobonds
What is a continent convertible bond?
Debt that is converted into equity if a prespecified trigger event occurs such as capitalisation falling below certain level..
What are the components of bond’s return?
Coupon and principle repayment. Coupon specified as percentage of nominal value.
What level are bonds normally redeemed at?
Nominal value at maturity date.
What is the relationship between a bond’s field and price?
Inverse relationship known as non linear convex relationship
What is duration?
Sensitivity of bond’s value with respect of yield changes.
How to calculate percentage change in bond’s price resulting in change in yields?
Modified duration = Macaulay duration/(1+R)
What does interest rate risk comprise of?
Price risk and reinvestment risk
What are the other types of risk?
Credit risk, default risk, inflation risk, currency risk and call risk.
What types of risks are there when investing in corporate bonds?
Default risk, credit risk. Also credit risk for sovereign bonds if issuing entity does not have power to create money in currency of issue.
Who assess likelihood of receiving payments from corporate or sovereign band?
Credit rating agencies.
What is the yield curve?
Relationship between yield on a bond and each bond’s maturity.
What is the shape of the yield curve determined by?
Current short term interest rates, preference of investors willingness to borrow/lend and specific supply and demand conditions.
What does the flat yield measure?
Measures interest rate income.
