Government Debt - CH2 Flashcards
Who issues debt in the UK?
The DMO.
How often are coupons paid on UK gilts?
Annually.
Why are gilts used as a benchmark for corporate bonds?
Because they’re seen as credit risk free.
How are gov’t bonds quoted?
On a 100 unit basis, e.g. £145 for 6% gilts 2028, £145 would be for 100 units.
Who receives the coupon for gilts?
Those holding the bond cum-dividend.
What is the Ex-dividend period?
7 day period where the purchaser of the bond is not entitled to the next interest payment (ownership change period).
What is an Index-Linked Gilt?
Where the coupons and principal are linked to an inflation index (RPI or CPI).
What happens to Index-Linked Gilts if there is no inflation?
The nominal coupon and nominal principal is paid.
What are 3 negatives of inflation?
- Purchasing power falls.
- Savings eroded (if inflation > interest rate).
- Cost of living crisis.
What is the Real Interest Rate?
The interest rate with inflation taken into account.
What is the calculation for Real Interest Rate?
[(1 + nominal interest rate) / (1 + inflation rate)] -1
How are bonds linked to inflation?
Bond prices are linked to the economic outlook, which is linked to inflation.
What is the CPI index?
Calculated each month by looing at a basket of goods and services, e.g. food, travel costs, heating.
What is the target CPI?
2%.
What is the RPI index?
Average measure of changes in the price of goods and services.
How often is the RPI index revised?
Never.
What is a Zero Coupon Bond?
A bond which doesn’t offer any interest/coupon payments. Instead, the buying price/nominal of the bond is offered at a discount, then is sold at full nominal at maturity.
What are STRIPS?
Stripping a bond down into it’s coupons and principal.
What type of bond is a stripped principal?
A zero coupon bond, whose face value depends on the prevailing interest rate.
What bonds can STRIPS be made out of?
Made out of US T-bills, or bonds the DMO says are suitable.
What are the Pros of stripping bonds?
Removes reinvestment risk, and investors can precisely match liabilities of bonds.
What is meant by ‘Reconstitution of gilts’?
Swapping strips for a conventional gilt.
What are Emerging Markets?
Markets for developing countries (e.g. BRIC).
What are Frontier Markets?
Countries with less developed markets and systems than emerging markets.
