What is a debenture?
A debenture is a secured loan agreement between a lender and a borrower with business assets used as security.
What is the difference between a fixed and floating debenture charge?
Fixed charge: Relates to physical, identifiable assets. This ranks higher than a floating charge.
Floating charge: Flexible and apply to business assets of the company that are not otherwise secured in favour of other lenders or banks. Ranked lower than a fixed charge.
List the differences between a Corporate Bond and Gilts (name at least 4)
- Corporate Bonds are more risky
- Prices are more volatile compared to gilts
- Corporate Bonds are bought and sold easier (especially by big companies) however, low quality bonds may be difficult to trade, particularly in crisis
- The spread between buying and selling price is wider than for gilts
- The creditworthiness of companies is constantly changing, unlike the government.
- Corporate Bond prices can vary, even through interest rates and inflation are stable.
- Yields on Corporate Bonds are generally higher than gilts. Reflects increased credit risk and lower liquidity.
Which account would you typically get higher interest rates with a UK deposit account or an offshore sterling account?
Offshore sterling account
ISAs are not an investment. What are they?
a tax wrapper.
Name at least 4 different NS&I products
- Premium bonds
- Green savings bonds
- Direct saver accounts
- Investment accounts
- Guaranteed income and growth bonds
- Income bonds
- Direct ISAs
- Junior ISAs
What is the minimum investment amount for NS&I Guaranteed Income/Growth Bonds? and how is the interest paid?
Minimum investment of £500 with interest being paid gross.
For the NS&I Green Savings Bond, how long is the fixed term for?
three-year fixed term.
What are money-market investments?
Wholesale market where banks, building societies, the government and others lend to and borrow from each other. They lend and borrow for periods ranging from a few hours to several months using short-term debt instruments.
What are the main types of securities that are traded in the money markets?
Treasury bills, commercial bills and certificates of deposit.
What are certificates of deposit and what are the features of CDs?
- CDs are receipts from banks for deposits placed with them.
- carries a fixed rate of interest, usually relating to SONIA. Fixed term to maturity.
- Certificates can be traded in the money markets if investor needs access to funds before maturity. Yields are slightly less due to the ability to trade.
- most CDs issued have 1-3 months maturity.
What are treasury bills and how are they issued?
Bills issued by the government to finance their short-term cash needs. Treasury bills don’t pay interest, they instead are issued at a price that is less than their par or face value and at maturity, the government pays the holder the full par value.
Interest is equal to the difference between the purchase price and maturity value.
What are commercial bills?
Commercial bills are short-term negotiable debt instruments issued by companies to fund their day-to-day cash flows. They operate in a similar way to treasury bills, however, the market is less liquid.
What is the difference between short-term money market funds and standard money market funds?
Short-term money market funds are ‘short-term’ and have an average maturity of no more than 60 days and a weighted average life of no more than 120 days, whereas, standard funds aim to make slightly higher returns and therefore invest in assets with extended maturity periods of 6-12 months.
What are fixed-interest securities?
Official bodies way of raising money to finance their longer-term borrowing requirements. In return for lending the money, the fixed interest security is entitled to receive regular interest payments and usually a repayment of capital at the end.
Investors can sell them on the stock market at any time.
What is the formula for interest yield and what is this yield for?
Formula is: coupon divided by clean price x 100.
Interest yield expresses the annual income from a bond as a percentage of the price an investor would have to pay for the bond. This can be misleading as bonds can produce capital gain/loss if held until redemption.
What is the formula for redemption yield and what is this yield used for?
Formula: Interest yield + (gain or loss to maturity divided by number of years to maturity) divided by clean price x 100.
(may need to work out the interest yield first).
Redemption yield is a more accurate calculation of the yield on a bond. It takes into account both the income payments and the capital gain/loss from holding the bond until maturity. This ignores any tax that would the investor may need to pay.
What are the key risks associated with bonds?
- Interest rate risk
- Liquidity risk
- Inflation risk
- Currency risk
- Default risk
What happens to bond prices when interest rates go up?
Bond prices fall due to a reduced demand, and the yield adjusts upwards.
What happens to bond prices when interest rates go down?
Bond prices rise due to increase in demand, and the yield adjusts downwards.
What are the most volatile bonds? and why are they more volatile?
Bonds with lower coupons and longer periods to redemption.
It is more volatile due to cash flow being received later in the bond’s life and is exposed to interest rate movements for a longer period of time.
What are the three main types of yield curves?
- Normal yield curve
- Flat yield curve
- Inverted/reverse yield curve
What are gilts?
Fixed interest securities issued by the UK government (via the DMO) when it needs to borrow money due to insufficient income to meet expenditure.
What is repo market?
Sale and repurchase agreement. In a repo agreement, one party agrees to sell gilts to another party with a formal agreement to repurchase equivalent securities at an agreed price on a specified future date.
