Equities and Bonds Basics Flashcards

What is a 'gilt strip'?

Answer: A process by which the coupon payments and principal repayment of a gilt are separated and sold individually as zero-coupon bonds

Gilt strips are created by separating (stripping) the individual cash flows of a conventional gilt — each coupon payment and the principal repayment — into separate zero-coupon bonds that can be traded independently.

What is 'par value' (also called face value or nominal value) of a bond?

Answer: The value at which the bond will be redeemed at maturity, typically £100 per £100 nominal

The par (or face) value is the amount the issuer repays the bondholder at maturity — for UK gilts, this is £100 per £100 nominal. Bonds can trade above par (at a premium) or below par (at a discount) in the secondary market.

What is a 'rights issue'?

Answer: An offer by a company to existing shareholders to buy additional new shares at a discount to the current market price

A rights issue is a way for a company to raise additional equity capital by offering existing shareholders the right to purchase new shares at a discounted price, usually in proportion to their existing holding.

What is an 'index-linked gilt'?

Answer: A gilt whose coupon and principal are adjusted in line with the Retail Prices Index (RPI)

Index-linked gilts are UK government bonds where both the coupon payments and the redemption value are adjusted in line with the Retail Prices Index (RPI), protecting the investor's return from the erosive effects of inflation.

What is 'earnings per share' (EPS)?

Answer: A company's net profit divided by the number of shares in issue

EPS is calculated by dividing a company's net profit (after tax) by the number of ordinary shares in issue. It measures the profitability attributable to each share and is a key metric used in valuing equities.

What is the price-to-earnings (P/E) ratio and what does it indicate?

Answer: The ratio of a company's share price to its annual earnings per share, indicating how much investors are willing to pay for each pound of earnings

The P/E ratio divides the current share price by EPS. A higher P/E suggests investors expect strong future growth or are willing to pay a premium for the company's earnings. It allows comparison of relative valuations across companies.