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Financial.E > Week 5: bonds > Flashcards

Week 5: bonds Flashcards

1
Q

What is a Bond?

A

Debt instrument, issued by a borrower for a fixed period of time, paying interest known as a coupon which is fixed at issue date and is paid periodically until it is redeemed at maturity, at which time the principal amount is repaid

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2
Q

How can we classify bonds

A

In terms of the nature of the bond

  • Can classify based on place of issue
  • Can classify by issuer
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3
Q

What are the variety of forms bonds come in?

A

Straight, plain vanilla or bullet bonds

  • Zero coupon bonds
  • Floating-rate or variable-rate bonds
  • Index-linked bonds
  • Convertible bonds
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4
Q

What are the differing classifications of Bonds based on place of issue?

A 
Domestic Bonds
-Foreign Bonds
-Eurobonds
(Issued in a currency outside that country)
e.g. Bond issued in US in GBP
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5
Q

What are the differing issuers of Bonds?

A

Central governments and government agencies

  • State and local governments
  • Companies
  • Supranational institutions (eg. World Bank)
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6
Q

What are the 3 big credit rating agencies?

A
  • Moodies
  • Standard and Poor (S&P)
  • Fitch
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7
Q

How does the credit rating agency scale work?

A

AA= Minimal Risk

All the way down to D which indicated a company/country defaulted

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8
Q

What the Current Types of Gilts?

A

Conventional gilts, for example: 1 1/2% Treasury Gilt 2047

Index-linked Gilts:
Coupon and Redemption increases with inflation

Gilt Strips:
breaking it down into its individual cash flows can be traded separately as zero coupon bonds

E.G. a three-year gilt will have seven individual cash flows: six (semi-annual) coupon payments and a principal repayment.

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9
Q

How do you calculate Perpetual Bonds?

A

PV = C/R

Where:

  • PV: Present Value of bond
  • C: The coupon rate x Nominal (par) value of the bond
  • R: Discount Rate
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10
Q

How do you calculate the Conventional Bond?

A

PV =
PV(P) = C/R (1 - 1/(1+R)t)+ V/(1+R)t

Where V is the par value

Where t is to the power of

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11
Q

What are the historic type of Gilts?

A
  • Undated gilts
  • Double-dated conventional gilts
  • Floating rate gilts
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12
Q

How do you calculate the interest yield?

A

Coupon/ Market Price

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13
Q

hat are the issues to calculating the Interest Yield?

A

Doesn’t take into consideration:

  • Time value of money
  • No way to see capital gain/loss
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14
Q

What is the Redemption Yield? (Also known as Yield to Maturity)

A

The discount rate such that the present value of all the cash inflows from the bond (interest plus principal) is equal to the bond’s current market price

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15
Q

How do you calculate the redemption yield?

A

YTM = (C+ F-P/N)/(F+P)/2

Where:

  • C = Coupon Rate
  • F = Face Value
  • P = Current Price
  • N = Number of Years
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16
Q

How do you calculate spot rates?

A 
p = (c+V)/1+r1
P = market price
V = par value
c = coupon
r1 = spot rate
17
Q

What is a Zero Coupon Bond?

A

only have payment on maturity

- pure discount bonds

18
Q

How do you calculate zero coupon bonds?

A

P0 = 100 / (1 + rt)^t

19
Q

How do we calculate Forward Rates?

A

foward rate = (1+r_t+1)^t+1 / (1+rt)^t

20
Q

What is the Interest Rate Hypothesis?

A

Expectations:
- Forward rate is the best market estimate of the future spot rate

Liquidity premium:
-Lenders prefer to lend short, whereas borrowers prefer to

Inflation Premium:

  • inflation risk is the greatest concern to investors
  • short term is easy, to do long term the need a premium

market segmentation:
-Demand and supply for bonds of different maturities will vary.

21
Q

definition of a coupon

A

yment on a bond is the annual interest payment that the bondholder receives from the bond’s issue date until it matures.

22
Q

redemption yield definition

A

yield of a stock calculated as a percentage of the redemption price with an adjustment made for any capital gain or loss which that price represents relative to the current price.

23
Q

definition of a treasury bill

A

short-dated UK or US government security, yielding no interest but issued at a discount on its redemption price.

24
Q

defintion of an index linked gilt

A

—pay interest that is linked to an underlying index, such as the Consumer Price Index (CPI).

25
Q

definiton of a gilt

A

nominal bonds that promise to pay a fixed coupon rate at set time intervals, such as every six months. They represent the majority of government debt. When a conventional gilt matures, its holder receives the last coupon and the principal.

26
Q

definition of interest yield

A

. the INTEREST paid on a BOND or LOAN STOCK etc., expressed as a percentage of the current market price of the bond or stock.

Financial.E (11 decks)

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