Course - Chapter 5

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What are Bond actually called?: 1. Debt instruments (an IOU)
How do they work? (4): 1. Primary investor lends capital e.g. £10k for 10 years.
2. Regular interest payments are agreed (coupon)
3. Every year interest is paid
4. In 10 years, £10k is returned
How are bonds priced?: In lots of 100 currency units
What are the benefits of investing in bonds? (2): 1. Income element
2. Tax planning advantage - know the exact date that the capital will be repaid.
What are the downsides to investing in bonds?(2): 1. Vulnerable to inflation - capital and coupon
2. Borrower may not be able to repay capital or interest (credit risk)
How is a bond\\\'s rate of interest calculated? (3): 1. Based on risk
2. Risk low on UK Debt = lower interest rate
3. Risk high on internet company = higher interest rate.
How is the risk attached to a particular investment assessed?: 1. By credit rating agencies
- Moody\'s
- Fitch
- Standard and Poor\'s
What is regarded as investment grade?: Moodyâ€™s S & P Fitch
Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
What is not regarded as investment grade? (2): 1. Anything lower than the top four tiers
2. Commonly referred to as junk
What is the element of price risk? (3): 1. If interest rates rise - rate becomes less attractive if lower
2. If interest rates fall - rate becomes more attractive if higher
3. Creates an inverse relationship
What is the risk in trading bonds?: Some bonds might be prone to liquidity risks if rarely traded.
How is a bond\'s yield calculated? (2): 1. Flat yield
2. Redemption yield
How is a bond\'s flat yield (running yield) calculated? (4): 1. Coupon value ÷
2. Price per £100 X
3. by 100
4. Expressed as a percentage
When is a redemption yield more useful? (1): When the bond is traded on the secondary market.
How do you calculated a bond\'s redemption yield? (3): 1. Flat yield +
2. per annum capital gain =

3. Redemption yield.
How do you calculate a per annum capital gain? (3): 1. Captial gain as percentage ÷
2. Investments redemption (3 years)=
3. Annualised return.
What is a yield curve? (3): 1. Shows yields available on same type of instrument but adjusted for different maturity dates.
2. Increase with time to reflect uncertainty
3. Times of crisis - inverse curve - high now, low later.
What are the lengths of the UK\'s gilts? (3): 1. Short-dated - 0-7 years
2. Medium-dated - 7-15 years
3. Lond-dated - 15+ years
Who manages issuing gilts in the UK?(2): 1. The Debt Management Office (DMO)
2. Division of the Treasury.
Describe UK\'s Government Bonds (4): 1. Name: Gilts
2. Settlement: 1D
3. Interest: 6 monthly
4. Issued by: DMO
Describe USA\'s government bonds (4): 1. Name: T note (1-10Y), T bond (10Y +)
2. Settlement: 1D
3. Interest: 6 monthly
4. Issued by: Bureau of Public Debt
Describe Germany\'s government bonds (4): 1. Name: Bunds-8y, Schatze-2Y, Bobbles-5Y
2. Settlement: Domestic 2D, Int 3D
3. Interest: Annually
4. Issued by: Finanzagentur
Describe France\'s government bonds (4).: 1. Name: BTANS
Describe Japan\'s government bonds (4): 1. Name: JGBs
2. Settlement: 4D if TSE Listed, specified date if OTC
3. Interest: 6 monthly
4. Issued by: Ministry of Finance
What are the 6 types of UK gilts?: 1. Conventional
2. Dual-dated
3. Index-linked
4. Irredeemable
5. Repos
6. Strips
Describe conventional UK Gilts (1): 1. Straightforward maturity date and specified fixed coupon.
Describe dual-dated UK gilts (4): 1. Fixed coupon
2. Has 2 maturity dates (window)
3. Government has a window to repay
4. Must repay during the window
Describe index-linked UK Gilts (3).: 1. Linked to the current rate of inflation
2. Added to initial coupon and rate of inflation
3. Investor\'s real value saved.
Describe Strips in regard to UK gilts (5): 1. No strips issued by govt
2. Create as OTC instrument
3. Gilt is basic foundation
4. Separates coupon value from redemption value
5. Traded as separate instruments
Describe corporate bonds (1-5): 1. Usually secured debt.
2. Secured on company\'s assets
3. Fixed charge over specific asset
4. Floating charge - over all company\'s assets
5. Fixed better than floating = seniority risk
Describe corporate bonds (6-7): 6. May be callable by the company - determines when redemption occurs.
7. A bond my be redeemable on a pre-arranged date or within stated periods - \'put\' feature.
Describe two alternative types of corporate bonds that do not pay any income (2): 1. Zero coupon bonds
2. Convertibles
Describe zero coupon bonds (ZCBs)(3): 1. No coupon value
2. Repay a specified amount
3. Issued at a discount
Describe how convertible corporate bonds work (2): 1. Can convert holding into shares at a specified date
2. The price of the shares and the option will influence whether or not a shareholder decides to convert.
Describe a floating rate note (FRN) (2): 1. Rate of interest is variable according to general rates
2. Usually set in accordance with a recognised standard - BOE\'s base rate or LIBOR + a specified percentage, e.g. 1%
Describe a medium term note (2): 1. Usually have maturities ranging from 9 months to 5 years.
2. Issued continually over a period of time as opposed to a single offering.
Describe permanent interest bearing shares (2): 1. Sometimes used by mutual societies
2. Irredeemable and pay out interest on a fixed coupon.
What is the difference between domestic and international bonds (3).: 1. Domestic issued in the UK
2. Denominated in sterling
3. International bonds may be issued to increase pool of investors, e.g. Eurobond
Describe a Eurobond (1): 1. European companies issued bonds denominated in US$.
Describe the Eurobond market (4): 1. Relatively new and prides itself on drive towards innovation
2. Issued in bearer form - guaranteeing anonymity
3. Pays interest gross - tax advantages
4. Less reg = higher liquidity
What is a specific downside to investing in international bonds? (2): 1. Exchange rate risk
2. Adverse price movements between the currencies.
Describe asset backed securities (2): 1. Pools illiquid assets such as credit card debt or mortgages into 1 saleable bundle
2. Blamed for causing the financial crisis.
How are Gilts traded and by who? (2): 1. Wholesale
2. By Gilt Edged Market Makers (Gemms)
How are gilts traded? (5): 1. Screen based
2. Similar to SEAQ
3. Prices are displayed by Gemms
4. Trades made over the phone
5. Retail electronic trading is also available - Bondscape
How are corporate and international bonds traded?: MOSTLY OTC, but can be through an exchange\'s electronic system.
How are Euro denominated bonds usually traded? (2): 1. Mostly on the Electronic EURO MTS platform,
2. Though larger trades can be arranged OTC.
What is the distinction between including interest up to the trade date? (2): 1. If the price given includes interest accrued up to the trade date known as DIRTY
2. If exclusive of accrued interest it is known as the CLEAN price, adjustment will occur during settlement

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