Fixed Interest Securities

Question 1

How long do fixed interest securities usually run for?

Answer 1

2-30 years.

Question 2

What is the nominal value

Answer 2

The amount a bond was sold for when originally sold.

Question 3

What happens to bonds if interest rates rise.

Answer 3

They become less attractive when compared to other investments

Question 4

What are the risks for fixed securities?

Answer 4

Market/Systemic risks
Interest rates
Inflation
Monetary and fiscal policy

Specific/Commercial risks
Liquidity risks (unable to sell)
Currency risks
Default risk

Question 5

Which bonds are affected more by bond volatility?

Answer 5

Lower coupons
Longer relationship periods

Question 6

What are the classifications of Gilts

Answer 6

Shorts -
less than 7 years (DMO)
Less than 5 years (financial press)

Mediums -
7-15 years (DMO)
5-15 (finacial press)

Longs -
Over 15 years

Undated - No redemption date

Question 7

How do Undated Gilts work?

Answer 7

Coupon and redemption amount fluctuates in line with inflation measured by RPI.

Issued before Sept 2005 RPI is taken 8 months before each payment.

After taken 3 months before.

Disposal is CGT free.
Income received is taxed income tax.

Question 8

What is the typical buyback period for a bond?

Answer 8

2 weeks

Question 9

What is the report rate

Answer 9

The interest on a gilt. Shown as the difference between what was leant to what is payed back.

Question 10

What is the report market used for?

Answer 10

The BOE to set interest rates.

Question 11

Describe a fixed charge

Answer 11

Charge over an asset expected not to fall in price over three terms of the loan.

Cannot be sold without the consent of the person holding the debeture

Highest priority charge on company wind up.

Question 12

Describe floating charge

Answer 12

Charge over any asset that isn’t being used as a security elsewhere.

Can be sold as the company carries on its normal business as long as there are sufficient assets left to repay the debenture holder.

Question 13

Describe FRN

Answer 13

A bond that is linked to a specific money market and reset every quarter.

Quoted as amount above that money market rate.

SONIA + 0.75%

Question 14

What is zero interest

Answer 14

The fact that stips do not pay interest instead they pay out on maturity.

Each strip is sold at a discount, and the price fluctuates due to numerous factors.

Question 15

What happens on the STRIPS market?

Answer 15

Gilts are separated from the coupon and sold separately.

Coupons for income
Capital for lump sums

Question 16

Why do companies choose to issue corporate bonds rather than taking a bank loan?

Answer 16

Cheaper
Access to a range of lender markets
Longer terms

Question 17

What is a debenture

Answer 17

A charged loan that has a charge over a business asset.

Question 18

How are debentures secured

Answer 18

With a fixed or floating charge.

Question 19

When a bond is convertible, is CGT paid

Answer 19

Yes, it does not come under normal exemption rules

Question 20

Explain PIBS

Answer 20

Bonds offered by building societies and listed on the stock exchange.

No redemption date

Payments can be missed and not recouped.

Nor covered by FSCS

Question 21

What is a PSB

Answer 21

PIBS that was sold by a building society that has now demutualised

Question 22

What are clean prices?

Answer 22

Prices quoted online or in newspapers for bonds.

Mid-market prices between buy and sell.

Ignore accrued interest.

Question 23

Describe cum (with) dividend

Answer 23

The purchaser of a bond will receive the full interest payment.

Bought with the clean price plus added interest price up to date of settlement. (Next business day)

Question 24

Describe ex (without) interest?

Answer 24

Bond sold within 7 days of interest payment.
Full 6-month payment will be made to the seller.
Deduction made from clean price to make up for loss of interest

Question 25

What is the dirty price?

Answer 25

The price a bond is actually sold at

Question 26

What happens on the primary bond market?

Answer 26

New bonds are offered via auction generally weekly for the government less frequently for companies.

Larger investors place bids at the price they want.

Individual investors offer non-competitive prices up to £500000 so generally not used by retail investors.

Companies use the services of investment banks and syndicates

Question 27

How long do companies take to accept terms on primary market sales?

Answer 27

24 hours

Question 28

What bonds are covered on the secondary market?

Answer 28

Goverment stocks
Company stocks
Overseas stocks
Eurobonds (issued in one currency traded in another)

Question 29

Who prescribes credit references?

Answer 29

Standard and poors
Moody’s

Question 30

What ratings are considered subinvestment grade or junk bonds

Answer 30

BBB- (standard and poors)
BBB3 (Moodys)

Question 31

What affects bond units?

Answer 31

Interest rates
Credit worthiness
Profitability
Amount of gearing
Restrictive covenants

Question 32

What is the running yield, flat yield, and interest yield.

Answer 32

The yield received not taking into account loss or gains.

Question 33

What is the running yield used for?

Answer 33

To measure performance and evaluate against other securities

Question 34

What is the redemption yield for?

Answer 34

Used to see if holding till maturity will cause a gain/loss.

Question 35

What fixed interest product is the most liquid

Answer 35

Gilts as the market is more responsive to and credit ratings are typically higher.