Bonds

Question 1

How frequently do UK & US government bonds tend to pay their coupons?

Answer 1

Twice yearly

Question 2

How much notice must an issuer give the investor that they are redeeming a bond?

Answer 2

3 months

Question 3

Which type of bond tends to have the lowest yield?

Answer 3

Developed Government bond

Question 4

Why do pension funds tend to like index-linked bonds?

Answer 4

It allows them to hedge their liabilities

Question 5

Which type of UK government bond is compliant with Shariah law?

Answer 5

Sovereign sukuk

Question 6

Which is the only type of Gilt that can potentially give rise to a CGT liability?

Answer 6

STRIPs

Question 7

What is the time difference between Treasury Notes, T-Bills and Treasury Bonds

Answer 7

T-Bills - less than 6 months
Treasury Notes - between 2 and 10 years
Treasury Bonds - between 10 and 30 years

Question 8

What is a debenture (in the UK)?

Answer 8

-Form of secured corporate bond
-Secured by either fixed or floating charge

Question 9

Why may companies choose to issue Floating Rate Notes?

Answer 9

Hedge against floating rate payments they may receive in the future

Question 10

Where do PIBS rank in case of liquidation?

Answer 10

Bottom

Question 11

What is a step-up/step-down bond?

Answer 11

Coupon steps up or down over the life of the bond

Question 12

What is a convertible bond?

Answer 12

Allows investor the right to convert to a set amount of equity in the issuer at a set date

Question 13

What is an exchangeable bond?

Answer 13

Allows investor the right to exchange for the shares of another company

Question 14

What is a eurobond? I.e. Eurodollar bond

Answer 14

A bond denominated in a different currency to the market in which they’re issued?

Eurodollar - dollar denominated but issued outside of the US

Question 15

Why may a eurobond have greater liquidity?

Answer 15

Issued in several financial centres simultaneously.

Thus a greater investor base.

Question 16

What is a repo?

Answer 16

An agreement whereby an individual borrows short-term money and provides gilts as security.

Question 17

What can the lender do when the borrower doesn’t repay his loan from his repo?

Answer 17

Sell the gilts on the open market

Question 18

What’s the difference between covered bonds and asset-backed securities?

Answer 18

The bank retains covered bonds on their balance sheet.

Question 19

If a company’s credit rating changes from BBB to BB, what does this indicate about its creditworthiness?

Answer 19

It has become less creditworthy

Question 20

What will happen to a bond’s price if the issuer’s credit rating falls?

Answer 20

Decrease

Question 21

What is the dirty price?

Answer 21

How much the prospective buyer will actually pay for the bond

Question 22

If a bond is cum-dividend, who receives the full coupon?

Answer 22

Buyer

Question 23

Find the gross redemption yield below:
Coupon = 6%
Clean price = £134
7 years to redemption

Answer 23

Running yield = 6/134 = 4.48%
Annual capital loss = 34/7 = £4.86
GRY = 4.48 - [(4.86/134)*100] = 0.85%

Question 24

Find the net redemption yield below:
Coupon = 5.4%
Clean price = £117
8 years to redemption
HRT

Answer 24

Running yield = 5.4/117 = 4.62%
Annual capital loss = 17/8 = 2.13
NRY = (4.620.6) - [(2.13/117)100] = 0.95%

Question 25

What usually drives an inverted yield curve?

Answer 25

Expectation of rising short-term interest rates

Question 26

What does modified duration tell investors?

Answer 26

% change in a bond’s price given a 1% change in yield

Question 27

If a bond has a longer duration, what does that say about the maturity, coupon & yield?

Answer 27

Longer maturity
Lower coupon
Lower yield