105 Questions
What is the term used to describe the amount of interest paid per year on a bond?
Coupon
In the context of bonds, what does the term 'nominal' refer to?
The amount of stock purchased
What is the convention for quoting bond prices in the bond markets?
Per $100 nominal of stock
What does the term 'stock' refer to in relation to bonds?
Amount of stock purchased and borrower name
Which term is synonymous with 'maturity date' when discussing bonds?
Redemption date
How is the market value of a bond holding calculated?
Multiplying the nominal amount by the coupon rate
What is the total value of outstanding debt globally, as mentioned in the text?
Over US$128 trillion
Which entity issues government bonds?
Supranational agencies
What is the main purpose of issuing a bond?
To finance investment projects
What is the primary characteristic of a bond?
Promise to repay loan on a fixed date
Which type of bonds are issued by companies like large banks?
Corporate bonds
Why has the difference in value between bonds and equity market capitalisation been closing?
Primarily due to large government bond issues since the financial crisis
What is the primary difference between Treasury bills and Treasury notes?
Maturity date
Which type of US Treasury security adjusts its principal value based on the consumer price index (CPI)?
Treasury inflation-protected securities
What are the main types of German government bonds mentioned in the text?
Bunds, Schatz, Bobls
In the UK, what financial instrument is known as 'gilts'?
Conventional government bonds
Which type of bond pays interest semi-annually but has a coupon that remains constant while being paid on the changing principal value?
STRIPS
What is the significance of the term 'gilts' for UK government bonds?
They have a gold or gilt edge when physical certificates were issued
'Gilt-edged stock' refers to what type of financial instrument historically?
'Gilts' in the UK government
What is one of the main advantages of investing in bonds?
Regular and certain flow of income for fixed interest bonds
What is a significant disadvantage associated with investing in bonds?
Erosion of income by the effects of inflation
What is a common risk associated with holding bonds?
Default risk
Which type of government bond risk refers to the possibility that a government might be unable to meet its financial obligations?
Default risk
How do bond prices typically react to an increase in general interest rates?
Fall
What is early redemption risk in bond investments?
Risk associated with issuer invoking a call provision and redeeming the bond early
In the context of bond investments, what is seniority risk focused on?
'Risk related to the seniority with which corporate debt is ranked in case of issuer liquidation'
What is the main consequence of a bond suffering from seniority risk?
It impacts the repayment priority of the bond
How does inflation risk affect the real value of a bond?
Decreases the nominal value
Which risk is associated with the ease of converting a security into cash?
Liquidity risk
What type of bonds are potentially subject to adverse exchange rate movements?
Bonds denominated in foreign currencies
How do Standard & Poor's and Fitch Ratings refine their credit ratings within a category?
By adding a plus or minus sign
What distinguishes investment grade bonds from non-investment grade bonds?
'High-yield' terminology used
Why are government bonds issued by Western governments considered major borrowers of money?
To finance spending and investment plans
What is the primary characteristic of the US government bond market?
Largest and most liquid market in the world
What are US government bonds generally known as?
Treasuries
What happens to the credit rating of a bond if circumstances change significantly?
It is upgraded or downgraded accordingly
How long is the most common maturity for Bunds?
10 years
What is the settlement period for domestic trades?
T+1
Which category of bonds is not included in the classifications for Japanese government bonds (JGBs)?
Municipal bonds
What is the typical range of maturities for policy bank bonds in China?
6 months - 50 years
What are the characteristics of ZCBs (Zero Coupon Bonds) in Japan?
Issued at a discount and carry no interest
How do Inflation-indexed bonds work in Japan?
Principal adjusts with CPI, fixed interest payments based on adjusted principal
Where do smaller investors submit non-competitive bids for new gilts in the UK?
Debt Management Office (DMO)
In which country's bond market are policy bank bonds quasi-sovereign?
China
Which government department manages the issuance of new gilts in the UK?
The Debt Management Office (DMO)
What settlement period applies to JGB trades in Japan?
T+1 settlement
What term is commonly used for instruments with a maturity of less than 12 months?
Commercial paper
In which market do the majority of corporate bond trading activities occur in most developed markets?
Over-the-counter (OTC) market
What is the key feature that helps differentiate corporate bonds?
Credit rating
What type of bonds are typically listed on stock exchanges?
Corporate bonds
Which term is often applied to debt instruments with a maturity exceeding 12 months?
Corporate bonds
What does a company seeking to raise funds through a bond issue often have to provide to assure investors of the bond repayment?
Security
What is the main benefit to the bank of engaging in securitisation of mortgages?
Removing mortgages from its balance sheet
Which of the following is NOT a form of credit enhancement for mortgage-backed securities?
Investor fees
In securitisation, what role does the special purpose vehicle (SPV) play?
Selling a pool of mortgages to create bonds
What is one notable advantage of asset-backed securities (ABSs) as mentioned in the text?
They easily convert illiquid assets into tradeable instruments
What was a significant consequence of including sub-prime mortgages in bond pools during the sub-prime crisis?
Bond prices collapse
Why did banks start issuing mortgage bonds backed by sub-prime loans?
To attract more investors with lower credit quality bonds
How do mortgage-backed securities differ from traditional bonds?
Mortgage-backed securities are backed by a pool of mortgages
What is the primary reason for investors to find mortgage-backed bonds attractive?
Asset backing and credit enhancements
How are mortgage-backed bonds created through securitisation offered to investors?
Through issuance by a special purpose vehicle (SPV)
What financial process do mortgage certificates represent?
Issuance of government-backed mortgage securities in 1970
What is a potential attraction for an investor holding convertible bonds?
The opportunity to convert the bond into ordinary shares for capital gains
What could be a consideration for a company issuing preferred bonds?
Potential dilution of existing shareholder interests
What distinguishes zero coupon bonds (ZCBs) from other types of bonds?
They provide returns only through capital growth, not income
What is a defining characteristic of asset-backed securities (ABSs)?
Composed of marketable assets bundled together
In what scenario would an investor holding convertible bonds rank ahead of existing shareholders?
If the company becomes insolvent and bondholders are repaid first
What distinguishes preferred bonds from ordinary shares?
Lower ranking in the issuer's capital structure
Why might investors pay a higher price for convertible bonds?
'Equity-like features' leading to higher yields
How are zero coupon bonds different in terms of returns compared to traditional coupon-paying bonds?
'Capital growth' as the sole source of returns
What is a key difference between preferreds and senior debt in an issuer's capital structure?
'Lower ranking' for preferreds compared to senior debt
'Asset-backed securities (ABSs)' are primarily characterized by:
'Marketable nature' from bundling non-marketable assets
What is the primary purpose of yield to maturity in bond investing?
To compare different bonds based on their interest rates
In what market condition is the yield curve described as 'positive'?
When it slopes upward
Why do investors demand a higher rate of interest for longer maturity bonds according to the text?
To compensate for greater risk and opportunity cost
What does the term 'yield curve' illustrate in the bond market?
Interest rates for bonds with similar maturities
How does the yield to maturity help investors in bond comparison?
It allows for direct comparison of returns from different bonds
What is the purpose of a 'negative pledge' clause in eurobonds issued by companies?
To prevent subordination of bondholders' interests to subsequent bond issues
What is the main advantage of the eurobond market over domestic bond markets for companies?
Ability to tap international lenders
What is the flat yield of a bond calculated as?
Annual coupon divided by the bond's price, then multiplied by 100
What is the yield to maturity of a bond a combination of?
Income and capital return assuming holding until maturity
In what situation would the yield to maturity be less than the flat yield?
Market price higher than par value
What innovative feature is commonly associated with dual-currency bonds?
'Par value in one currency and coupon payments in another'
How are yields on bonds typically measured?
'Interest rate payable on the nominal amount'
What does the investor need to take into account when calculating the 'yield to maturity' of a bond?
'Income and capital return' until maturity
'Gilt-edged stock' historically refers to what type of financial instrument?
'UK government bonds'
'Convertible bonds' mentioned in the text typically offer what feature?
'Ability to convert into shares'
What distinguishes covered bonds from asset-backed securities?
Covered bonds have assets on the issuer's balance sheet, while ABSs do not.
Why are covered bonds an important source of term funding for banks in Europe?
They are backed by assets that provide security to bondholders.
What is the defining characteristic of Eurobonds?
They are denominated in a currency different from that of the issuing financial center.
In which scenario would a foreign bond typically be issued?
A German company issuing a sterling bond to US investors.
Why did the Eurobond market expand significantly in the 1970s?
To facilitate the recycling of revenues from US oil sales.
Why are Eurobonds named as such despite not being restricted to European financial centers?
'Euro' originates from US dollar deposits in the European market.
Which defining characteristic makes Eurobonds stand out among other types of international bonds?
Their denomination currency differs from that of the issuing financial center or centers.
What is a main reason for Eurobonds being a popular choice for multinational companies?
They facilitate raising capital in multiple currencies simultaneously.
What is a key benefit of Eurobonds for governments when compared to domestic bonds?
They provide access to a broader investor base due to their cross-border nature.
What risk do investors potentially face when investing in Eurobonds denominated in a foreign currency?
Inflation risk due to currency devaluation.
What is the main benefit for bondholders when security is offered over an issuer's assets?
Increased safety compared to unsecured borrowings
What distinguishes fixed security from floating charge as forms of security for corporate debt?
Floating charge implies specific assets are charged.
What is the purpose of a call provision in a corporate bond?
To give the issuer the option to repurchase the bond before maturity
What feature makes Medium-Term Notes (MTNs) different from other debt instruments?
They are continuously offered to investors over time.
What determines the interest rate on Floating Rate Notes (FRNs)?
Benchmark rates like SOFR or SONIA
What is a sinking fund requirement associated with in corporate bonds?
'Call' provisions for periodic redemptions
Why might an issuer find call provisions attractive when issuing corporate bonds?
To facilitate refinancing at lower interest rates
How do Fixed-Rate Bonds differ from Floating Rate Notes (FRNs)?
'Fixed-Rate Bonds have predetermined interest rates.
Explore the significance of bonds in the global investment market, comparing their value to equities. Delve into the reasons behind the increasing value of government bonds post-financial crisis. Gain insights into the characteristics and importance of government and corporate bonds.
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