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Basic Features of a Bond. Pay a fixed amount of interest periodically to the holder of record Repay a fixed amount of principal at the date of maturity. Basic Features of a Bond. Bond market is divided by maturity Money Market - short-term issues that mature within one year

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Basic features of a bond
Basic Features of a Bond

  • Pay a fixed amount of interest periodically to the holder of record

  • Repay a fixed amount of principal at the date of maturity


Basic features of a bond1
Basic Features of a Bond

  • Bond market is divided by maturity

    • Money Market - short-term issues that mature within one year

    • Notes - intermediate-term issues that mature between one and ten years

    • Bonds - long-term obligations with maturity greater than ten years

  • Remaining life (maturity) affect price volatility


Bond characteristics
Bond Characteristics

  • Intrinsic features

    • Coupon - yield (interest income)

    • Maturity - term or serial (municipalities)

    • Principal value - different from market value

    • Type of ownership - bearer or registered

  • Types of Issues

    • Secured (senior) bonds

    • Unsecured bonds (debentures)

    • Subordinated (junior) debentures


Bond characteristics1
Bond Characteristics

  • Indenture provisions

  • Features affecting a bond’s maturity

    • Callable (call premium)

    • Noncallable

    • Deferred call

    • Nonrefunding provision

    • Sinking fund


Rates of return on bonds
Rates of Return on Bonds

where:

HPRi,t = the holding period for bond i during the period t

Pi,t+1 = the market price of bond i at the end of period t

Pi,t = the market price of bond i at the beginning of period t

Inti,t = the interest payments on bond i during period t

The holding period yield (HPY) is:

HPY = HPR - 1


The global bond market structure
The Global Bond-Market Structure

  • Participating issuers

    • 1. Federal governments

    • 2. Agencies of the federal government

    • 3. State and local political subdivisions (municipalities)

    • 4. Corporations

    • 5. International issues

      • Foreign bonds

      • Eurobonds


Participating investors
Participating Investors

  • Individual investors

  • Institutional investors

    • Life Insurance Companies

    • Commercial Banks

    • Property and Liability Insurance Companies

    • Pension Funds

    • Mutual Funds


Bond ratings
Bond Ratings

Major Rating Agencies

  • Standard & Poor’s

  • Moody’s

  • Fitch Investor Services


Alternative bond issues
Alternative Bond Issues

Domestic government bonds

  • United States - T-bills, notes, bonds. TIPS

  • Japan - medium term, long term, super long term

  • Eurozone – government bonds

  • United Kingdom - short gilts, medium gilts, long gilts


Government agency issues
Government Agency Issues

United States

  • Not direct issues, but backed by “full faith and credit” of the U.S. government

  • GNMA pass-through certificates

    Japan

  • Government associate organizations

    United Kingdom

  • There are no agency bonds in the U.K.

    Eurozone

  • Agency bonds are not broken down in the Eurozone


Municipal bonds
Municipal Bonds

  • General obligation (GO) bonds

  • Revenue bonds

  • Interest payments are exempt from federal income tax

  • Convert the tax-free yield of a municipal bond selling close to par to an equivalent taxable yield (ETY)


Equivalent taxable yield
Equivalent Taxable Yield

Where:

i = coupon rate of the municipal obligations

T = marginal tax rate of the investor


Municipal bond guarantees
Municipal Bond Guarantees

  • Bond insured against default risk

    • Insurance is irrevocable for the life of the issue

  • Four private bond insurance carriers

    • Municipal Bond Investors Assurance (MBIA)

    • American Municipal Bond Assurance Corporation (AMBAC)

    • Financial Security Assurance

    • Financial Guaranty Insurance Company (FGIC)


Municipal bond guarantees1
Municipal Bond Guarantees

  • Insured bonds obtain AAA (Aaa) ratings

  • Issues with private guarantees have more active secondary market, and lower required yield


Corporate bonds
Corporate Bonds

  • Mortgage bonds

  • Collateral trust bonds

  • Equipment trust certificates

  • Collateralized mortgage obligations (CMOs)

  • Other asset-backed securities (ABS)

  • Variable rate notes


Corporate bonds1
Corporate Bonds

  • Zero-coupon and deep-discount bonds

    • Minicoupon bonds

    • Original-issue discount (OID) bonds

    • Taxes due on the implied interest

  • High-yield bonds (speculative bonds and junk bonds)

    • Noninvestment grade with rating below BBB or Baa


Japanese corporate bond market
Japanese Corporate Bond Market

  • Bonds issued by industrial firms or utilities

  • 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


U k corporate bond market
U.K. Corporate Bond Market

  • Debentures

  • Unsecured loans

  • Convertible bonds


Eurozone corporate bond market
Eurozone Corporate Bond Market

  • Nonbank corporate bonds including industrial and utility firms

  • “Corporate-monetary Financial” including borrowing by banks


International bonds
International Bonds

  • Foreign bonds are sold in one country and currency by a borrower of a different nationality

    • Yankee bonds are U.S. dollar denominated bonds sold in the U.S. but issued by a foreign firm

  • Eurobonds are underwritten by international bond syndicates and sold in several national markets


International bonds1
International Bonds

  • United States

    • Yankee bonds register with SEC

    • Eurodollar bond market affected by changes in value of U.S. dollar

  • Japan

    • Samuri bonds - yen denominated issued by non-Japanese firms in Japan

    • Euroyen bonds - yen denominated, sold outside Japan

  • United Kingdom

    • Bulldog bonds are sterling-denominated bonds issued by non-English firms and sold in London

    • Eurosterling bonds are sold in markets outside London by international syndicates

  • Eurozone

    • Market popular among foreign issuers including issuers domiciled in the U.S.

    • Impressive growth in Eurobonds issued by non-residents


Obtaining information on bonds
Obtaining Information on Bonds

  • Less emphasis on fundamental analysis

  • Most bond investors rely on rating agencies for credit analysis

  • Market and economic conditions

  • Intrinsic bond features

  • Popular publications available:

    • Wall Street Journal, Barron’s, Business Week, Fortune, Forbes, Federal Reserve Bulletin, Survey of Current Business


Interpreting bond quotes
Interpreting Bond Quotes

  • Quoted on basis of yield or price

  • Price quotes are percentage of par

    • 98 1/2 is not $98.50 but 98.5% of par

    • A municipal $5,000 bond quoted at 98 1/2 would be $4,925


Corporate bond quotes
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645


Corporate bond quotes1
Corporate Bond Quotes

CompanyLast Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford7.45July 162031 80.625 9.461 50330 213,645

Issued by Ford Motor Company


Corporate bond quotes2
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645

The maturity date of this bond


Corporate bond quotes3
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645

The last transaction price was 80.625 percent of par or $806.25, which implies an yield to maturity (YTM) for this bond of 9.461 percent


Corporate bond quotes4
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645

The computed yield spread for the Ford bond is 503 basis points (5.03 basis points)


Corporate bond quotes5
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645

Comparable U.S. treasury Issue


Corporate bond quotes6
Corporate Bond Quotes

Company Last Last EST UST EST $

(Ticker) Price Yield Spread VOL

Ford 7.45July 162031 80.625 9.461 50330 213,645

The trading volume for this bond is over $213 million


Treasury and agency bond quotes
Treasury and Agency Bond Quotes

  • Notations

    • “n” = treasury note

    • “i” = inflation-indexed issue

    • “p” = treasury note on which nonresident aliens are exempt from withholding taxes on interest

  • Quotes resemble those used for OTC securities because they contain both bid and ask prices


Treasury and agency bond quotes1
Treasury and Agency Bond Quotes

GOVT. BONDS & NOTES

Maturity Ask

Rate Mo/Yr Bid Asked Chg. Yld.

5.750 Nov 05n 101:05 101:06 …. 3.13


Treasury and agency bond quotes2
Treasury and Agency Bond Quotes

GOVT. BONDS & NOTES

Maturity Ask

Rate Mo/Yr Bid Asked Chg. Yld.

5.750 Nov 05n 101:05 101:06 …. 3.13

This is a 5.75 percent obligation bond due in November 2005. The bid quote is 101:05, and the ask is 101:06


Treasury and agency bond quotes3
Treasury and Agency Bond Quotes

  • U.S. Treasury Strips

    • “ci” is the coupon interest portion stripped from the note

    • “np” is the principal payment for the treasury note

  • Treasury Bills

    • Pure discount instrument - there is no coupon, they pay par at maturity

    • The bid-ask is not the price but the yield


Municipal bond quotes
Municipal Bond Quotes

Quote from The Blue List of Current Municipal Offerings

$200,000 of Indiana State Office Building bonds

Guaranteed by MBIA

These are zero coupon bonds due July 1, 2010

The yield to maturity is given as 5.6%

To determine the price you compute the discount value

The dealer offering the bonds is Bear Sterns, listed in the back of the publication with their phone number

200 INDIANA ST OFFICE BLDG COMMN MBIA 0.000 07/01/10 5.60 BEARSTER


Municipal bond quotes1
Municipal Bond Quotes

  • Notations

    ETM = escrow till maturity

    M/S/F = mandatory sinking fund

    (C97) = this bond became callable in 1997

    When the market yield equals the coupon rate, the price is 100 and they are referred to as dollar bonds

    “+” in the left column indicates a new item

    “#” before yield to maturity or price indicates a change


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