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Bond markets (types of bond (debenture (secured loan against assets…
Bond markets
types of bond
debenture
secured loan against assets floating charge
mortgage debenture
unsecured loan stock
subordinated stock
convertible bonds
option for investor to convert into equity of the company at some future date
yield curve theories (LIME)
liquidity preference theory
investors prefer liquid to illiquid assets. Yield curve more upward sloping/less downward sloping than suggested by pure expectations theory alone
inflation risk premium theory
higher yield to compensate for holding longer dated stocks...
market segmentation theory
yields at each term determined by supply and demand from investors with liabilities of that term e.g. banks (short-term) and pension funds (long-term bonds). Two areas move somewhat independently
expectations theory
yield curve determined by economic factors which drive the market's expectations for future short term interest rates
cashflows on conventional and IL bonds
conventional
semi-annual coupons fixed
redemption payment (usually at par) fixed in nominal terms
relationship between GRYs on conventional gov, IL gov and corps
nominal yield = risk--free real yield + expected future inflation + inflation risk premium
inflation risk premium determined by...
degree of uncertainty over inflation
balance between investors requiring a fixed return and those requiring a real return
characteristics (SYSTEM T)