Trading fixed interest securities Flashcards
what are the differences when a bond is sold above par and traded at par.
Where a bond is traded at par, it is being sold at its nominal value. Where it is sold above par, it’s being sold for more than the nominal value and below par for less.
Who receives the interest when a bond is bought cum (with) dividend?
the purchaser will receive the
full interest payment (for the six months) even though they will have held the bond for less than six months. To compensate for this, the buyer will pay the ‘clean price’
plus an amount of interest to compensate the seller for lost interest from the last interest payment up to date of date of settlement (typically the next business day after it has been purchased).
Who receives the interest when a bond is bought ex (without) dividend?
where a bond is sold within 7 days of a an interest payment falling due, the full 6 month payment will be made to the seller. If the bond is sold within this period but before the interest is actually paid out, it is sold without dividend which is known as
“ex” dividend. The price is adjusted (deducted from the clean price) to reflect the fact that the buyer loses out on that interest from the date of buying to the interest distribution date.
What is the primary market used for when issuing bonds?
How a bond is issued will vary based on each issuer. The UK government (governments are the largest issuer in the bond market) uses its Debt Management Office (DMO) within the Treasury to issue
new Gilts via auction on a weekly basis to meet its financing costs.
How are bids placed for bonds in the primary markets?
Larger investors place bids at a price they want to pay and if they are successful in the auction, they pay the price they
bid at. Individual investors can access this market but only up £500,000 via a non-competitive bid, if they succeed then
they pay the average of all accepted prices in the auction.
Typically, quantities are very large and as such it not usually possible for retail investors to participate in this market.
How do companies and other institutions issue bonds?
Companies and other institutions issue bonds less frequently than governments and many will use the services of an
investment bank or other institutions (a group of banks known as a syndicate) to place the bonds into the primary
market. A similar process applies where investors make indicative bids at a particular price based on the details of the bond that has been marketed, with acceptance and a firm bid made within 24 hours of final terms being agreed.
