Fixed Interest Flashcards

1
Q

What happens to the price and yield of a bond if interest rates in the market increase?

A

Price of bonds fall

Yields will rise

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2
Q

If interest rates in the market fall what happens to bond prices and yields?

A

Price will rise

Yield will fall

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3
Q

In what circumstances is the fixed interest paid by bonds more attractive?

A

When interest rates in the market fall

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4
Q

What is a yield curve?

A

Shows the relationship between yields on bonds and the time they have remaining to redemption.

On a graph short dated bonds will be on left and long dated on right

Indication of market expectations

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5
Q

Why are long dated bonds considered higher risk?

A

Far more uncertainty regarding long term interest rates and inflation.

Investors demand higher returns on long dated bonds as a reward for risk taken.

Will pay less so yields will be higher

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6
Q

What is a normal (positive) yield curve show?

A

Shows the yield increasing the longer the term to redemption

Long dated bond yield more than short dated ones

Reflects investors expectations regarding long term interest rates and inflation will be higher

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7
Q

What are investors expectations when there is a normal yield curve?

A

Investors may be willing to accept low yields in short term if interest rates are low

If interest rates are expected to rise then they will demand higher rates over long term

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8
Q

What causes a shallow or flat yield curve?

A

When interest rates are expected to remain same level over long term.

Means little difference between short and long dated bond yields

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9
Q

What causes an inverted yield curve?

A

Interest rates are currently very high but expected to fall significantly in the future

Investors may demand high yields on short dated but prepared to accept lower yields on long dated stock.

Short term inflation will rise and long term inflation fall

If long dated gilts are in short supply (high demand by pension providers) pushes up prices and reduces yields

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10
Q

What is the least volatile bonds?

A

Short dated

High coupon

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11
Q

What is the most volatile bond?

A

Long dated

Low coupon

Undated most volatile

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12
Q

What does pull to redemption mean?

A

As bonds come closer to redemption their prices become close to par

No one would wish to sell for significantly less than £100 or buy for significantly more than £100 if close to redemption.

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13
Q

What are long dated bond prices more affected by?

A

Interest rate changes

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14
Q

What is the tax position on gilts?

A

No CGT on disposal

Coupons pay gross but income tax due by self assessment

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15
Q

What is modified duration?

A

Measure of sensitivity of bonds price

To changes in interest rates

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16
Q

What is credit quality?

A

Measure of credit worthiness/risk of default

Determined by rating agencies/credit rating

17
Q

What is a debenture and what are the two types?

A

A corporate bond that offers security for the loan

Fixed charge - over specified assets which can’t be sold without bond holders permission

Floating charge - over non-specified assets which can be sold by the company without bond holders permission - provided no default

18
Q

What is loan stock?

A

A corporate bond with no security

19
Q

What are the DMO definitions of bonds for Shorts, mediums, longs?

A
Shorts = less than 7 years
Mediums = 7-15 years
Longs = Over 15 years
20
Q

What is convertible loan stock?

A

Offers option to convert to ordinary shares

Specified dates and rates

Conversion = CGT

21
Q

What are PIBS?

A

Issued by Building Societies

Perpetual subordinated bonds (PSB) if building society converts to banks

No obligation to redeem (undated)
sensitive to interest rates
No qualify for FSCS
Rank behind all creditors
Interest non cumulative and paid half yearly
CGT Exempt
22
Q

What influences the price of corporate bonds

A
Inflation
Interest rate changes
Crediting rating/financial strength
Company performance - management
Duration - period to redemption
Demand and supply
Currency/geography
Coupon
23
Q

Macaulay duration?

A

Weighted average term to maturity if the cash flows from a bond.

Hedging out interest risk
Predict returns
Immunisation strategy