CISI Introduction to Securities and Investments Chapter 4

What is a bond?

A debt instrument where the issuer borrows money from investors and agrees to repay with interest.

Who are the main bond issuers?

Governments, local authorities, and corporations.

What is the par (nominal) value of a bond?

The amount repaid to the investor at maturity, usually £100 or £1,000 per bond.

What is the coupon rate?

The annual interest rate paid on a bond, based on its nominal value.

What is the maturity date?

The date when the bond issuer repays the principal amount to investors.

What is a gilt?

A UK government bond issued by HM Treasury.

What are Treasury bills?

Short-term government debt securities with maturities of less than one year.

What are index-linked gilts?

UK government bonds whose interest and principal payments rise with inflation.

What are corporate bonds?

Bonds issued by companies to raise finance, paying fixed or variable interest.

What is a fixed-rate bond?

A bond that pays a constant interest rate throughout its life.

What is a floating-rate note (FRN)?

A bond with an interest rate that varies with a benchmark, such as LIBOR or SONIA.

What are zero-coupon bonds?

Bonds issued at a discount that pay no interest but repay full value at maturity.

What are convertible bonds?

Corporate bonds that can be converted into shares at a future date.

What are callable bonds?

Bonds that can be redeemed early by the issuer before maturity.

What are puttable bonds?

Bonds that allow investors to demand early repayment before maturity.

What are perpetual bonds?

Bonds with no fixed maturity date that pay interest indefinitely.

What are Eurobonds?

International bonds issued in a currency different from the issuer’s home currency.

What are domestic bonds?

Bonds issued within a country and denominated in that country’s currency.

What are foreign bonds?

Bonds issued by a foreign entity in the domestic market, denominated in the local currency.

What are covered bonds?

Bonds backed by a pool of assets, typically mortgages, that remain on the issuer’s balance sheet.

What are asset-backed securities (ABS)?

Bonds backed by a pool of loans or receivables, such as credit card debt or auto loans.

What are mortgage-backed securities (MBS)?

A type of ABS backed specifically by mortgage loans.

What is a high-yield bond?

A bond with a lower credit rating that offers higher returns to compensate for higher risk.

What are investment-grade bonds?

Bonds with high credit ratings (BBB− or above) indicating lower default risk.

What is credit risk?

The risk that a bond issuer will fail to pay interest or repay principal.

What is interest rate risk?

The risk that bond prices will fall if interest rates rise.

What is inflation risk?

The risk that rising prices will reduce the real value of a bond’s payments.

What is liquidity risk?

The risk that an investor cannot sell a bond quickly without affecting its price.

What is market risk?

The risk that bond prices fluctuate due to changes in market conditions.

What is duration?

A measure of a bond’s sensitivity to interest rate changes.

What is yield?

The return an investor earns from holding a bond.

What is the current yield?

Annual coupon income divided by the current market price of the bond.

What is the redemption yield (YTM)?

The total return if the bond is held to maturity, accounting for coupons and capital gain or loss.

What is the yield curve?

A graph showing the relationship between bond yields and maturities.

What does a normal yield curve indicate?

Long-term bonds offer higher yields than short-term ones due to greater risk.

What does an inverted yield curve indicate?

Short-term yields are higher than long-term yields, often signalling a recession.

What is a flat yield curve?

When yields are similar across short- and long-term maturities.

What are bond ratings?

Assessments by rating agencies of a bond issuer’s creditworthiness.

Who are the main credit rating agencies?

Moody’s, Standard & Poor’s, and Fitch Ratings.

What is a default?

Failure of a bond issuer to pay interest or repay principal when due.

What is a sovereign bond?

A bond issued by a national government in its own currency.

What are municipal bonds?

Bonds issued by local authorities or municipalities to fund public projects.

What is a corporate spread?

The difference in yield between a corporate bond and a government bond of similar maturity.

What is a benchmark bond?

A government bond used as a reference for pricing other debt securities.

What is a repo (repurchase agreement)?

A short-term borrowing arrangement where bonds are sold and later repurchased at a set price.

What is clean price?

The price of a bond excluding any accrued interest.

What is dirty price?

The price of a bond including accrued interest since the last coupon payment.

What is accrued interest?

The interest earned on a bond since the last coupon payment but not yet paid.

What is the Debt Management Office (DMO)?

The UK government body responsible for issuing gilts and managing public debt.

What is STRIPS?

Separate Trading of Registered Interest and Principal Securities – zero-coupon gilts created by splitting coupons and principal.