Fixed interest

Question 1

How is the next coupon on an index-linked gilt determined?

Answer 1

• Take RPI value.
• 3 months prior to coupon date.
• Divide by RPI set at issue date.
• Apply to the coupon.
• Divided by two/paid half yearly.

Question 2

What does a flat yield curve indicate?

Answer 2

• Interest rates not expected to rise.
• Expected that inflation will not increase.
• Slow economic growth.

Question 3

What is meant by Macauley duration?

Answer 3

• Weighted;
• average term;
• in years;
• for purchase price to be paid back;
• by cash flows/coupons;
• and redemption value.

Question 4

What economic factors may cause an increase in the duration of a fixed interest fund?

Answer 4

• Peak interest rates
• Peak inflation
• Bond yields high
• Attractive entry point
• Reduction in new issuance
• Central bank action