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Chapter 18

Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown. Chapter 18. Chapter 18 Bond Fundamentals. Questions to be answered:

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Chapter 18

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  1. Lecture Presentation Softwareto accompanyInvestment Analysis and Portfolio ManagementSeventh Editionby Frank K. Reilly & Keith C. Brown Chapter 18

  2. Chapter 18Bond Fundamentals Questions to be answered: • What are some of the basic features of bonds that affect their risk, return, and value? • What is the current country structure of the world bond market and how has the makeup of the global bond market changed in recent years?

  3. Chapter 18Bond Fundamentals • What are the major components of the world bond market and the international bond market? • What are bond ratings and what is their purpose? • What is the difference between investment-grade bonds and high-yield (junk) bonds?

  4. Chapter 18Bond Fundamentals • What are the characteristics of bonds in the major bond categories such as governments (including TIPS), agencies, municipalities, and corporates? • How does the makeup of the bond market in major countries such as the United States, Japan, the United Kingdom, and Germany differ?

  5. Chapter 18Bond Fundamentals • What are the important characteristics of corporate bond issues developed in the United States during the past decade such as mortgage-backed securities, other asset-backed securities, zero-coupon and deep discount bonds, high-yield bonds, and structured notes?

  6. Chapter 18Bond Fundamentals • Within each of the major bond categories, what are the differences between major countries such as the United States, Japan, the United Kingdom, and Germany • How do you read the quotes available for the alternative bond categories (e.g., governments, municipalities, corporates)?

  7. 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

  8. 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

  9. Bond Characteristics • Indenture provisions • Features affecting a bond’s maturity • Callable (call premium) • Noncallable • Deferred call • Nonrefunding provision • Sinking fund

  10. 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

  11. Corporate Bonds • Mortgage bonds • Collateral trust bonds • Equipment trust certificates • Collateralized mortgage obligations (CMOs) • Other asset-backed securities (ABS) • Variable rate notes

  12. 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

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