1. Introduction to Investments
MTH6100 Actuarial Mathematics

7. Fixed Interest Securities
Issued by Governments & companies when they wish to borrow money (usually long term money).
Usually listed & tradeable
Priced per nominal amount of bond (eg per £100 nominal)
Regular interest payments (“coupons”) of known amount paid until date of maturity (“redemption date”)
“Par” means the nominal amount
Bond prices and redemption amounts are defined in relation to par - “at par” “above par” and “below par”

8. Fixed Interest Securities - Example
Vodaphone 5.625% 4 Dec 2025
Annual coupon of £5.625 per £100 nominal.
Repayable at par in December 2025.
Current price is above par at £ per £100 nominal.
Pre-tax IRR to an investor at current price is 2.75% pa. This is known as the “gross redemption yield”.
The running yield is the term for the immediate cash return to an investor before allowing for tax and any capital gains or losses on the bond.
Running Yield = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑒𝑟 £100 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 £100 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 = % 𝑥 =4.6%

9. Government Bonds v Corporate Bonds
UK gilts, US treasuries, JGB, German bund
Often considered very low risk (but…)
Markets usually large and liquid
Usually easy to buy/sell with low trading costs
Insurer/pension fund demand for long term and index linked bonds reducing liquidity for some issues
Corporate Bonds
Known by name of issuer
Risk depends on quality of issuer
Markets largely illiquid except for largest issues
Higher trading costs
Many insurers and pension schemes would follow a “buy and hold” strategy

10. “57 Varieties” of Corporate Bond
Debentures
Bonds that provide some sort of security to investors.
Example: A mortgage debenture
Unsecured
Bonds with no special security for investors. Investors rank alongside other creditors in the event of bankruptcy.
Eurobonds
A particular form of bond which is traded internationally and which is often issued in $ or Euro. Typically for larger more liquid issues.
Convertibles
Convertible into shares of the company in some conditions. Two broad scenarios:
Issued by bank/insurance company as part of their regulatory capital; or
“conversion option” added to make bond more attractive to investors.
Asset Backed Securities
Fixed interest securities backed by income producing assets. Example: utility cashflows, “Bowie bond”
Certificates of Deposit
Short term borrowings (up to 6 months by banks and building societies).

11. Typical Problems
Explain the key characteristics of a {government security}
Determine the price…
Determine the gross or net redemption yield…
Analyse impact of bond restructuring
Complexities:
Tax
Optional redemption dates
Index Linked Securities