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Bond : The Basics by Binam Ghimire. Learning Objectives. Understand the meaning and terminologies in bond Understand types and feature of bond Bond Ratings. Previous Knowledge. Fixed Income Securities. Pure-discount security Coupon Security. Fixed Income Securities.

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bond the basics by binam ghimire
Bond : The Basics

by BinamGhimire

learning objectives
Learning Objectives
  • Understand the meaning and terminologies in bond
  • Understand types and feature of bond
  • Bond Ratings
fixed income securities
Fixed Income Securities
  • Pure-discount security
  • Coupon Security
fixed income securities1
Fixed Income Securities
  • Personal Savings – in a Commercial Bank: Demand Deposits, time-deposits, Certificates of deposits and Jumbos
  • Money Market Instruments: Commercial Paper, CDs, Bankers’ Acceptances, Eurodollars, Repurchase Agreements
  • Bond
bond what is it
Bond: What is it?
  • IOU
  • Long term fund requirement: issue bonds
  • Bond meaning: IOU certificate in which a company promise to make a series of fixed interest payments and in the end repay the debt
bond what is it1
Bond: What is it?
  • From Paper to Electronic recording
bond terminologies
Bond:Terminologies
  • Price = ? Yield = ?
  • Coupon = ?
  • The price of the bond is ……….. per …………..
  • Therefore to buy ……………….. face value of this bond would cost ……………..
  • You would receive ……………….. per annum per €100 of bond held
  • A holder of €1000 bond would receive ……………….. on the 4th Sept. each year
bond terminologies1
Bond:Terminologies
  • 10Y Benchmark Bund 1.5% 4/9/22 Price = 101.154, Yield = 1.372%
  • A 10 year German Government AAA rated debt security, offering a 1.5% fixed coupon (paid once per year)
  • The price of the bond is €101.154 per €100
  • Therefore to buy €1000 face value of this bond would cost €1011.54
  • Coupon -You would receive €100 x 1.5% per annum per €100 of bond held
  • A holder of €1000 bond would receive €15 on the 4th Sept. each year
bond terminologies2
Bond:Terminologies
  • Yield to Maturity (YTM)
  • YTM is the interest rate that makes the present value of a bond’s payments equal to its price.
  • The YTM incorporates both the coupon return plus any capital gain or loss from holding the bond to maturity (…………….%)
  • Redemption Value and Maturity date
  • 100% face value repaid on ………………..
  • Basis
  • Day count convention is …………………/………………
bond terminologies3
Bond:Terminologies
  • Yield to Maturity (YTM)
  • The YTM incorporates both the coupon return plus any capital gain or loss from holding the bond to maturity (1.372%)
  • Redemption Value and Maturity date
  • 100% face value repaid on 4th September 2022
  • Basis
  • Day count convention is Actual/Actual
bond conventions
Bond:Conventions
  • See excel file
bond types issuers
Bond:Types (Issuers)
    • Treasury Bond: Government
  • Corporate Bond: Companies
  • Municipal Bond: State or local government
  • Foreign Bond: Foreign government/ companies
bond types cash flows
Bond:Types (Cash Flows)
  • Pure Discount Bonds
  • Level Coupon Bonds
  • Consols
bonds types nature
BondsTypes (Nature)
  • Redeemable
  • Irredeemable
  • Convertible
  • Non-convertible
  • Extendable/ Retractable
  • Zero coupon/ Strip
  • Junk/ high yield/ non investment grade
  • Eurobonds
  • Inflation linked
  • Puttable
  • Floating
  • Preferred stock
  • ….
bonds types innovations
BondsTypes (Innovations)
  • Inverse Floaters
  • Asset-Backed Bonds
  • Catastrophe Bonds
  • Indexed Bonds
bonds more
Bondsmore …
  • The indenture
  • Call provisions
  • Sinking Funds
  • Private Placements
  • Bankruptcy, Distressed Securities
bond ratings
Bond Ratings
  • Bonds of the same maturity offer a different rate of return
  • Why ?
    • Due to the risk of default
    • The difference between the return on “safe” bonds (i.e. government) and “risky” bonds is called a default premium
  • How do you assess risk ?
    • Moodys and S&P - evidence suggest that low ranked bonds promise higher returns
bond ratings1
Bond Ratings
  • Since the primary function of bonds as an investment vehicle is to make fixed payments, it's essential that the company or government issuing the debt has the ability to make all payments on time and in full. Bond ratings evaluate the debt issuer to determine the risk of default
  • The leading rating agencies, Standard & Poor's and Moody's Investors Services, assign ratings when a bond is first issued, and that rating helps determine how high the bond's interest rate will be. If the agencies assign a high rating, that means there's little risk of default, so the issuer can obtain a lower interest rate
  • While the rating systems of Moody's and S&P differ somewhat, they're more alike than different. Both agencies have investment-grade ratings, which connote a high level of creditworthiness, and speculative ratings, which mean higher risk levels and merit higher interest rates
  • Here are Moody's ratings, from highest to lowest. Investment grade: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3. Speculative grade: Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C1
  • Here are S&P's ratings. Investment grade: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-. Speculative grade: BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, D