Debt Markets, Fixed Income Securities and Money Markets
This domain tests the HKD debt market, the money market that funds it, and the arithmetic of bond pricing and interest-rate risk. Expect computational items on price, yield and duration rather than long descriptive answers.
Market structure
The Exchange Fund Bills and Notes programme is the benchmark HKD curve: 91-, 182- and 364-day bills and 2-, 3-, 5-, 10- and 15-year notes, issued by the HKMA on behalf of the Exchange Fund and used by banks for liquidity management. HIBOR fixings are published across tenors from overnight to 12 months and price most floating-rate HKD lending. Money-market instruments include interbank deposits, negotiable certificates of deposit, commercial paper and repo. Bond Connect links overseas investors to the China Interbank Bond Market (Northbound), with Southbound trading into Hong Kong's bond market added in 2024.
Pricing and risk
Price is the present value of coupons and principal discounted at the yield; price and yield are inversely related and the curve is convex. Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay ÷ (1 + y) and approximates the percentage price change for a 1% yield move. A zero-coupon bond's duration equals its maturity.
Worked example. A 3-year bond, 5% annual coupon, face HK$1,000, yield 4%. Price = 50/1.04 + 50/1.04² + 1,050/1.04³ = 48.08 + 46.23 + 933.27 = HK$1,027.58. Macaulay duration is 2.86 years, so modified duration = 2.86/1.04 ≈ 2.75. A 100bp rise should therefore cost about 2.75%, giving roughly HK$999.3. The exact repriced value at 5% is HK$999.93 - the small difference is convexity.
Credit and retail products
Read credit through rating, spread over the benchmark, covenants and seniority. Retail issuance includes iBonds (inflation-linked, 3-year) and Silver Bonds (residents aged 60+), both under the Government Bond Programme.
Traps
- Quoting the coupon as if it were the yield.
- Ignoring accrued interest when settling between coupon dates.
- Applying duration to a large yield move without allowing for convexity.
- Assuming Exchange Fund paper carries credit risk - it is an Exchange Fund obligation.