Bonds and fixed income

Harbourline plc is issuing £200m of 5-year bonds with a 4.5% annual coupon. The coupon was fixed last week, but markets have moved and investors now want a yield of 5.2% for 5-year Harbourline risk. The bonds will be sold at whatever price gives that yield.

A client buys $5m face of a US Treasury note paying a 3% coupon semi-annually, on 15 May and 15 November. The trade settles on 18 July 2027 at a clean price of 97.25. Accrued interest is counted ACT/ACT: actual days since the last coupon over actual days in the coupon period.

A fund holds four annual-pay bonds, all priced at a yield of 5%. The risk committee asks which holding would lose the largest percentage of its value if yields jumped by 1 percentage point overnight.

You hold £20m face of a 10-year 4% annual-coupon bond priced at par (yield 4%). Your desk wants no exposure to small parallel moves in yields, and the only liquid hedge is a 5-year 4% bond, also at par.

Your scheme holds a £500m portfolio of long-dated bonds with a modified duration of 18 and a convexity of 400. In a sell-off, long yields rise by 1.5 percentage points within a few days.

A BBB-rated 5-year bond with a 5% annual coupon trades at 94.00. The 5-year government yield is 4.2%. Your models give a 1.5% annual default probability and a 60% loss given default.

You buy €50m of German Bunds and finance them in repo for 30 days. The lender applies a 2% haircut and charges a repo rate of 3% (ACT/360). Over the 30 days, Bund prices fall by 1.5%.

A £400m pool of loans is split into a £320m senior tranche, a £60m mezzanine tranche and a £20m equity tranche. Losses are expected to be about 3% of the pool. Your regulator wants to see that any tranche you buy loses nothing even if pool losses reach 12%.