Financial Markets and Products
What this domain tests
This section examines how New Zealand fixed-income securities are issued, structured and priced, and whether you can apply those concepts to client conversations. Expect definitions, yield/price relationships and product-risk questions rather than equity analysis.
Market structure and products
NZDX is NZX's market for quoted debt securities. Typical instruments include New Zealand Government Stock, local authority bonds, corporate bonds and supranational issues. Each offer is governed by a product disclosure statement (PDS) under the Financial Markets Conduct Act 2013. Key terms are face value, coupon, maturity, credit rating, yield and ranking. Bonds are debt, not equity: holders rank as creditors, but repayment depends on the issuer's ability to pay and the security's terms.
Pricing and risk
Bond price is the present value of future coupons and principal, discounted at the required yield. Price and yield move inversely. Accrued interest is added to the clean price to give the dirty price. Duration approximates sensitivity to yield changes; credit spreads and liquidity also affect pricing.
Worked example
A 3-year bond pays a 5% annual coupon on a face value of 100 and the required yield is 6%. Price = 5/1.06 + 5/1.06² + 105/1.06³ = 4.72 + 4.45 + 88.17 = 97.34. If the yield falls to 5%, the price becomes 100. The reasoning: lower discount rates raise the present value of fixed cash flows, so the bond price rises.
Traps that cost marks
Confusing coupon with yield; ignoring accrued interest; using simple rather than compound discounting; treating a high yield as evidence of safety; and assuming all quoted debt has the same liquidity or credit quality.