The UK Gilt And Corporate Bond Market Flashcards
(7 cards)
1
Q
Briefly explain gilts
A
- UK government bonds referred to as “gilt-edged” securities or “gilts”
- Usually pay gross coupons semi-annually
- Used to finance the shortfall between government expenditure and government revenue
- They are issued to cover the PSNCR - public sector net cash requirement (deficit between government spending vs revenue)
2
Q
Who issues gilts?
A
- The DMO - Debt Management Office issues gilts via auction
- Gilt settlement is made via CREST
3
Q
Who are the main holders of gilts?
A
- UK pension funds
- UK insurance companies
- Overseas investors
- UK banks
- Building societies
- Private individuals
4
Q
Who are the key market participants in the market for UK gilts?
A
- GEMMs - gilt edged market makers
- GEMMs MUST bid/ participate in DMO/ primary auctions
- Continuously quote bid-ask prices for gilt issues and must trade at these prices to maintain liquidity
- They get special dealing privileges with DMO and inter-dealer brokers (IDBs)
5
Q
Explain what corporate bonds are and how they’re sold
A
- They’re UK bonds - they can be sold as an open offer for sale OR directly to a small number of professional investors (private placing)
- Mainly trade in decentralised, dealer based, OTC markets where liquidity is provided by dealers/ other market participants (not on an exchange)
6
Q
Explain the concept of “bought deal” with regards to corporate bonds
A
Involves a syndicate of banks
Lead bank/ manager buys all the bonds and then sells them to the syndicate.
Risk of distributing the bonds is transferred to the underwriter/manager (may have to sell at lower price if market is weak)
7
Q
Explain the concept of “fixed price re-offering” with regards to corporate bonds
A
Once lead manager and syndicate buy bonds together directly from the issuer.
The syndicate members sell the bonds (commonly offered at a fixed price for a certain period)
