Investing in Bonds Flashcards
1
Q
Advantages of holding a bond
A
- More secure than shares of same company:
Creditors higher ranking than shareholder - Regular and predictable income
- Know repayment date : Bonds mature
- Inflation - proof if index linked
2
Q
Disadvantages of holding a bond
A
- Can decline in value : Interest rates increase + Bond price fall
- Capital loss if bought above par and held to maturity
- Loan stock may not be repaid if the issuer defaults
- Non - Index linked bonds will lose valuation through inflation
3
Q
Flat Yield Calculation
A
Annual Coupon / Market Price x 100
Flat Yield also known as ;
Simple Yield
Income Yield
Running Yield
4
Q
Credit Rating Agencies
A
Evaluate Default Risk
- Probability of Issuer defaulting
5
Q
Investment Grade
A
Safer
S+P + Fitch AAA AA A BBB
6
Q
Investment Grade for S+P + Fitch
A
Safer
S+P + Fitch
AAA
AA
A
BBB
7
Q
Investment Grade for Moody’s
A
Safer
Moody’s
Aaa
Aa
A
Baa
8
Q
Speculative grade for S+P + Fitch
A
Risk Default increases
S+P + Fitch
BB B CCC CC C D
9
Q
Speculative grade for Moody’s
A
Risk Default increases
Moody's Ba B Caa Ca C D
10
Q
Changing Riskier to Grade
A
Yield increases
Price decreases
