# WEEK 5 - Bonds Flashcards

What is a Bond?

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

How can we classify bonds

- In terms of the nature of the bond
- Can classify based on place of issue
- Can classify by issuer

What are the variety of forms bonds come in?

- Straight, plain vanilla or bullet bonds
- Zero coupon bonds
- Floating-rate or variable-rate bonds
- Index-linked bonds
- Convertible bonds

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

-Domestic Bonds

-Foreign Bonds

-Eurobonds

(Issued in a currency outside that country)

e.g. Bond issued in US in GBP

What are the differing issuers of Bonds?

Central governments and -government agencies

- State and local governments
- Companies
- Supranational institutions (eg. World Bank)

What are the 3 big credit rating agencies?

- Moodies
- Standard and Poor (S&P)
- Fitch

How does the credit rating agency scale work?

AA= Minimal Risk

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

What the Current Types of Gilts?

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.

How do you calculate Perpetual Bonds?

PV = C/R

Where:

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

How do you calculate the Conventional Bond?

PV =

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

Where V is the par value

Where t is to the power of

What are the historic type of Gilts?

- Undated gilts
- Double-dated conventional gilts
- Floating rate gilts

How do you calculate the interest yield?

Coupon/ Market Price

What are the issues to calculating the Interest Yield?

Doesn’t take into consideration:

- Time value of money
- No way to see capital gain/loss

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

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

How do you calculate the redemption yield?

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

Where:

- C = Coupon Rate
- F = Face Value
- P = Current Price
- N = Number of Years

CHECK NOTES FOR CLEARER PRESENTATION OF CALCULATION