Bond Fundamentals
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Transcript of Bond Fundamentals
Bond FundamentalsPresented by IDIstiaque Ahmed 20203010
Sifat Monjur Shamrat 24040
Raisul Kibria 21068
A.K.M Arif-ul-hoque 22066
Basic Features of a BondPublic bonds are long-term, fixed-obligation
debt securities packaged in convenient, affordable denominations for sale to individuals and financial institutions.
The issuer of the bond agrees to:1. Pay a fixed amount of interest periodically to
the holder of record2. Repay a fixed amount of principal at the
date of maturity
Basic Features of a BondBond market is divided by maturity
Short-term issues with maturities of one year or less. The market for these instruments is commonly known as the money market.
Intermediate-term issues with maturities in excess of 1 year but less than 10 years. These instruments are known as notes
Bonds - long-term obligations with maturity greater than ten years
Bond CharacteristicsIntrinsic features
Coupon : indicates the income that the bond investor will receive over the life (or holding period) of the issue. This is known as interest income, coupon income, or nominal yield.
Maturity - The term to maturity specifies the date or the number of years before a bond matures. There are two different types of maturity, term and serial.
Bond CharacteristicsPrincipal value – It represents the
original value of the obligation.Type of ownership - bearer or registeredWith a bearer bond, the holder, or
bearer, is the owner, so the issuer keeps no record of ownership.
The issuers of registered bonds maintain records of owners and pay the interest directly to them.
Bond CharacteristicsTypes of Issues
Secured (senior) bonds : are backed by a legal claim on some specified property of the issuer in the case of default.
Unsecured bonds (debentures): are backed only by the promise of the issuer to pay interest and principal on a timely basis.
Subordinated (junior) debentures: possess a claim on income and assets that is subordinated to other debentures.
Bond CharacteristicsIndenture provisions: The indenture is the
contract between the issuer and the bondholder specifying the issuer’s legal requirements.
Features affecting a bond’s maturityCallable (call premium) :the issuer to
retire the bond at any time with a typical notification period of 30 to 60 days.
Non callable: the issuer cannot retire the bond prior to its maturity.
Bond CharacteristicsDeferred call : the issue cannot be called
for a certain period of time after the date of issue.
Non refunding provision: prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon refunding bond.
Sinking fund: specifies that a bond must be paid off systematically over its life rather than only at maturity.
Rates of Return on Bonds
ti,
ti,1ti,ti, P
IntPHPR
where:HPRi,t = the holding period for bond i during the period tPi,t+1 = the market price of bond i at the end of period tPi,t = the market price of bond i at the beginning of period tInti,t = the interest payments on bond i during period t
The holding period yield (HPY) is:
HPY = HPR - 1
The Global Bond-Market StructureThe market for fixed-income securities is
substantially larger than the listed equity exchanges because corporations tend to issue bonds rather than common stock.
Participating issuers1. Federal governments2. Agencies of the federal government3. State and local political subdivisions (municipalities)4. Corporations5. International issues
o Foreign bondso Eurobonds
Participating InvestorsIndividual investorsInstitutional investors
Life Insurance CompaniesCommercial BanksProperty and Liability Insurance Companies
Pension FundsMutual Funds
Bond RatingsThere are three major rating agencies in USA:Fitch Investors Service,Moody’s, andStandard and Poor’s.The rating agencies analyze the issuing
organization and the specific issue to determine the probability of default and inform the market of their analyses through their ratings.
Non-rated bondsVery small issues and bonds from certain
industries, such as bank issues, are known as nonrated bonds.
Alternative Bond IssuesDomestic government bonds
United States - T-bills, notes, bonds, TIPS.Japan - medium term (2, 3,or 4 years), long
term (10 years), super long term (private placements for 15 and 20 years).
Germany - bund bonds (Bonds issued by the Federal Republic of Germany), contract with Kassenverien (A global bond issued and held in safekeeping within the Germany Securities Clearing System)
United Kingdom - short gilts (maturities of less than 5 years), medium gilts (5 to 15 years), long gilts (15 years and longer).
Government Agency IssuesUnited States
These are not direct issues, but backed by “full faith and credit” of the U.S. government.
Six government-sponsored enterprises and over two dozen federal agencies issue these bonds.
GNMA pass-through certificates, which are obligations of the Government National Mortgage Association.
Japan The agencies in Japan, referred to as government
associate organizations, issues agency bond.Germany
The major agencies are the Federal Railway and the Federal Post Office.
Municipal BondsMunicipalities in the United States
issue two distinct types of bonds:General obligation (GO) bonds: backed
by the full faith and credit of the issuer and its entire taxing power.
Revenue bonds: serviced by the income generated from specific revenue-producing projects of the municipality.
Interest payments from municipal bonds are exempt from federal income tax.
Corporate Bonds U.S. corporate bond marketUtilities dominate the U.S. corporate bond market.Mortgage bonds :Provides greater security to the
bondholder and a lower interest rate for the issuing firm.
Collateral trust bonds : As an alternative to pledging fixed assets or property, a borrower can pledge financial assets, such as stocks, bonds, or notes, as collateral.
Equipment trust certificates: Equipment trust certificates are issued by railroads, airlines, and other transportation firms with the proceeds used to purchase equipment which serves as the collateral for the debt.
U.S. corporate bond marketCollateralized mortgage obligations (CMOs): CMO
investors own bonds that are serviced with the cash flows from mortgages. The CMO substitutes a sequential distribution process that creates a series of bonds with varying maturities to appeal to a wider range of investors
Other asset-backed securities (ABS):A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.
Variable rate notes: It has floating coupon rate. After the first year or two, the notes are redeemable at par.
U.S. corporate bond marketZero-coupon and deep-discount bonds
A zero coupon discount bond promises to pay a stipulated principal amount at a future maturity date, but it does not promise to make any interim interest payments.
A modified form of zero coupon bond is the OID bond where the coupon is set substantially below the prevailing market rate.
High-yield bondsAlso referred too as speculative-grade bonds and
junk bonds. Noninvestment grade with rating below BBB or
Baa
Japanese Corporate Bond Markethe corporate bond market in Japan is made up of
two components:• bonds issued by industrial firms or utilities and• bonds issued by banks
Minimum issuing requirements are specified by the Ministry of Finance.
Bonds issued by banks to finance loans to corporation Commercial banks Long-term credit banks Mutual loan and savings banks Specialized financial institutions
German Corporate Bond MarketBank bonds : may be issued in
collateralized or uncollateralized form. German mortgage bonds are collateralized
bonds of the issuing bank backed by mortgage loans.
German commercial bonds: Its collateral consists of loans to or guarantees by a German public-sector entity.
Private Loan Agreements :Agreement between borrowers and large investors (usually a bank) who make the loans but can sell it to other investors.
U.K. Corporate Bond MarketsCorporate bonds in the United Kingdom are available in three forms: debentures, unsecured loans, and convertible bonds.
Almost all U.K. corporate bonds are callable term bonds.
International BondsEach country’s international bond market has
two components.
1.Foreign bonds are sold in one country and currency by a borrower of a different nationality
2.Eurobonds are underwritten by international bond syndicates and sold in several national markets
International BondsUnited States
Yankee bonds are issued by foreign firms who register with the SEC and borrow U.S. dollars, using issues underwritten by a U.S. syndicate for delivery in the United States.
The Eurodollar bond market is dominated by foreign investors, and the center of trading is in London.
JapanSamuri bonds - yen denominated issued by non-
Japanese firms in JapanEuroyen bonds - yen denominated, sold outside
Japan
International BondsGermany
DM-denominated bonds issued by foreign companies are Eurobonds
United KingdomBulldog bonds are sterling-denominated bonds
issued by non-English firms and sold in LondonEurosterling bonds are sold in markets outside
London by international syndicates
Obtaining Information on Bond PricesAlmost all prices reported are based upon self-
reporting of yield estimates by bond dealers who trade government, corporate, or municipal bonds.
Interpreting Bond QuotesAll bonds are quoted on the basis of either yield
or price.Price quotes are always interpreted as a
percentage of par.98 1/2 is not $98.50 but 98.5% of parA municipal $5,000 bond quoted at 98 1/2 would be
$4,925
Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4
Issued by AT&T8.125% coupon rate
matures in 2022Current yield = coupon/market price = 7.7%
52 of these bonds traded that day
The closing price was 105 3/8% of par which was up 1/4 from the prior day
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