Fixed Income Securities

Question 1

What are the term classifications of:

Short Term Bonds
Medium Term Bonds
Long Term Bonds

Answer 1

Short Term - < 7 Years

Medium – 7 – 15 Years

Long-Term > 15 Years

Question 2

To reduce default risk, what do corporations and FIGs use to issue debt?

Answer 2

Special Purpose Vehicles

Question 3

What is a fixed charge?

Answer 3

Fixed charge is a legal charge or mortgage, placed upon a company’s fixed or permanent assets.

Question 4

What is a floating charge?

Answer 4

Floating charge places a more general charge on those assets that continually flow through the business.

Question 5

What is a Eurobond?

Answer 5

A eurobond is an international bond that is denominated in a currency not native to the country where it is issued.

Question 6

What form are Eurobonds issued in?

Answer 6

Bearer Form

This means that they are often held at a clearing house and are immunised.

Question 7

What has higher priority during a liquidation, Fixed or Floating charges?

Answer 7

In liquidations fixed charges have priority over floating charges.

Question 8

What types of assets can an ABS be backed by?

Answer 8

Mortgages, Credit Card cash flow, Car loans, Home equity loans, student loans.

Question 9

Who issues UK government bonds?

Answer 9

The DMO

In some cases, the DMO can take the Gilts onto its own books if the auction is not fully taken up.

Question 10

What are the two ways in which the DMO sell Gilts?

Answer 10

Tender and Auction

Question 11

What obligations do GEMMs have?

Answer 11

Quote a two way price to customers

Exceptions – Do not need to provide firm prices to other GEMMs, market makers and inter-dealer brokers.

Question 12

What three privileges to GEMMs get?

Answer 12

Exclusive rights to competitive telephone bidding

Exclusive facility to trade as counterparty of DMO (Standing repo facility)

Exclusive access to IDB screens

Question 13

What does the letter “A” next to a Gilt denote?

Answer 13

The letter A next to a GILT indicates that when a tranche is issued, the next payment may not include a full coupon.

Question 14

What is the minimum competitive bid in a DMO gilt auction?

Answer 14

£1,000,000

GEMMs and OMOs only.

Question 15

What is the maximum non-competitive bid size in a DMO gilt auction?

Answer 15

£500,000

No price bid, pay volume weighted average price of succesful competitive bids.

Question 16

What market are TAPS and interim fundings done in?

Answer 16

The secondary market via GEMMs

Question 17

What is the differene between pricing in an Auction and a Tender

Answer 17

In an Auction - Bidding is competetive, only those paying high enough will be accepted. You pay what you bid.

In a tender - Bids are submitted, and the highest price that all gilts can be sold at is used - this could be more or less than what you bid.

Question 18

What is the minimum bid size in a UK T-Bill Tender?

Answer 18

£500,000 (bids must be in multiples of £50,000)

Subsequent trading is done in multiples of £25,000.

Question 19

When do UK T-Bills settle?

Answer 19

T+1

Question 20

Who are primary market participants regulated by?

Answer 20

The FCA and the PRA

Question 21

What are the two main types of bond switching in portfolios?

Answer 21

Anomaly and Policy Switching

Question 22

What is the difference between anomaly and policy switching?

Answer 22

Anomaly switching switches between two bonds with similar characteristics, but different prices or yields?

Policy switching is between bonds with dissimilar characteristics.

Question 23

What is the third type of bond switching called?

Answer 23

Intermarket Spread Switching

Switching between Corporate and Sovereign debt when spreads are perceived to be excessive - or when a flight to quality is set to take place.

Question 24

What reasons might cause a portfolio manager to undertake a policy switch?

Answer 24

Changes in:

Interest Rates

The Yield Curve

Credit Ratings