Fixed Interest Securities Flashcards
How long do fixed interest securities usually run for?
2-30 years.
What is the nominal value
The amount a bond was sold for when originally sold.
What happens to bonds if interest rates rise.
They become less attractive when compared to other investments
What are the risks for fixed securities?
Market/Systemic risks
Interest rates
Inflation
Monetary and fiscal policy
Specific/Commercial risks
Liquidity risks (unable to sell)
Currency risks
Default risk
Which bonds are affected more by bond volatility?
Lower coupons
Longer relationship periods
What are the classifications of Gilts
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
How do Undated Gilts work?
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.
What is the typical buyback period for a bond?
2 weeks
What is the report rate
The interest on a gilt. Shown as the difference between what was leant to what is payed back.
What is the report market used for?
The BOE to set interest rates.
Describe a fixed charge
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.
Describe floating charge
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.
Describe FRN
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%
What is zero interest
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.
What happens on the STRIPS market?
Gilts are separated from the coupon and sold separately.
Coupons for income
Capital for lump sums
Why do companies choose to issue corporate bonds rather than taking a bank loan?
Cheaper
Access to a range of lender markets
Longer terms
What is a debenture
A charged loan that has a charge over a business asset.
How are debentures secured
With a fixed or floating charge.
When a bond is convertible, is CGT paid
Yes, it does not come under normal exemption rules
Explain PIBS
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
What is a PSB
PIBS that was sold by a building society that has now demutualised
What are clean prices?
Prices quoted online or in newspapers for bonds.
Mid-market prices between buy and sell.
Ignore accrued interest.
Describe cum (with) dividend
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)
Describe ex (without) interest?
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
What is the dirty price?
The price a bond is actually sold at
What happens on the primary bond market?
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
How long do companies take to accept terms on primary market sales?
24 hours
What bonds are covered on the secondary market?
Goverment stocks
Company stocks
Overseas stocks
Eurobonds (issued in one currency traded in another)
Who prescribes credit references?
Standard and poors
Moody’s
What ratings are considered subinvestment grade or junk bonds
BBB- (standard and poors)
BBB3 (Moodys)
What affects bond units?
Interest rates
Credit worthiness
Profitability
Amount of gearing
Restrictive covenants
What is the running yield, flat yield, and interest yield.
The yield received not taking into account loss or gains.
What is the running yield used for?
To measure performance and evaluate against other securities
What is the redemption yield for?
Used to see if holding till maturity will cause a gain/loss.
What fixed interest product is the most liquid
Gilts as the market is more responsive to and credit ratings are typically higher.
