bonds

what is the nominal/par value of a bond

the amount the borrower repays the holder at maturity

what is used to calcuate interest

nomnal (NOT price)

what is the coupon of a bond

interest paid (usually fixed % of nominal)

what is redemption/maturity date

when the nominal value is repaid

what is FRN

floating rate note

what is floating rate note

[green on slide - pls figure out]

what is an index-linked bond

coupon and principla adjust with a price index (RPI/CPI) to protect against inflation

two types of ownership of bonds

registered

bearer

what is a flat yield

annual coupon / price x 100

is coupon the percentage number or converted to a decimal

percentage number

what is flat yield also called

running/interest yield

what does flat yield ignore

any capital gain or loss to maturity

timing (no time value of money)

useless for FRNs since coupon keeps changing

who is flat yield best suited to

short term holders

what is GRY

gross redemption yield

what else is this known as

YTM - yield to maturity

what is gross redemption yield/yield to maturity

discount rate that equates future cashflows to today’s price - the bond’s internal rate of return (IRR)

what does gross redemption yield/yield to maturity involve/ignore

involves: coupons, and gain/loss to redemption

ignores: tax (bc its ‘gross’)

what is NRY

net redemption yield

what is net redemption yeild

GRY recalculated using after-tax cashflows

what is modified duration

a measure of volatility - approximate % price change for a 1 point move in interest rate

(higher = more volatile)

a bond with longer maturity or lower coupon will….

….have a higher MD

what are convertible bonds

given the right not obligation to convert the bond into a set number of ordinary shares

when can a bond be converted

only if the share value exceeds the bond’s redemption value at maturity

PICK UP HERE FROM ‘trades at a PREMIUM to share value’

[is green on the slide anyways so figure out pls - same with conversion price adjusts]

formula for conversion premium %

(bond value - share value) / share value x 100

formula for conversion ratio

nominal value / conversion price of shares

two types of prices

clean vs dirty

clean prices

flat - they exclude interest earned since the last coupon

dirty prices

clean + accrued

where do u find clean prices

they r the listed price

where do u find dirty prices

they are what the buyer actually pays

accrued formula

coupon payment x (days since last payment + days between payments)

dirty vs clean price visualisation

.

day count conventions

[green on ppt - av a look]

what is a spread

the difference between two yields, expressed in basis points

what does a spread price

relative risk - the risker the issuer vs benchmark, the wider the spread

what are the 3 types of benchmarks

1 - gov bonds

2 - swap rates

3 - reference rates

how are gov bonds used as a benchmark

most recently issued gov bond

nearest the corporate bond’s maturity

how are swap rates used as a benchmark

rates in the fixed for floating swaps market:

bonds are quoted over or under swap

how are reference rates used as a benchmark

published rates such as SOFR (also like libor, but that’s been retired now)

the yield curve

[whole slide green - go over this]

present value of a bond

[whole slide also green but i have a feeling we did this in ecn134]

what can happen to interest rates that is quite unexpected

can be negative

example of negative interest rates

post 2008 some countries (eg. switzerland, japan) charged banks to hold excess cash - pushing them to lend instead

why would banks accept this

safety (see picture)

concerns about negative interest rates

• savers keeping physical cash so draining the banking system

• pension funds + insurers struggle to grow their pots

• encourages yield chasing into risky bonds, and possible asset price bubbles