​central government

​government agencies
​Type of issuers
​corporations

​Floating rate = coupon fixed but with smth

​borrower ​Issuer
​flexible ​legal contract between
​lender ​Bondholder

​maturity date
​indenture provisions
​timing of interest payments

​Specifies important features ​method of interest calculation

​callable/convertible

​clauses that reduce agency cost

c​ oupon rate ​US & Japan pay 2 times a year

​repay fixed principal at maturity date
​(aka nominal rate) ​IR issuer agrees to pay each year
​europe once
​6 months (semi-annual)
​debt instruments requiring borrower to repay a ​coupon
​interest
​principal plus interest over set period ​the actual (in $ terms ) annual amount paid
​12 months (annual)
​Coupon ​aka dollars / pound

​Principal due here ​Par value/face value

​(par value) ​sepcified life to maturity

​original value of obligation

​since promise fixed income stream ​what are bonds ​Principal ​(usually in $1k increments)
​“fixed income capital market" ​
​in reality may not be fixed ​or income stream determined by specific formula
​bonds can trade at ​premium
​Terminology ​NOT the same as market price ​… to par
​Bonds/ debt instruments better ​Bond market
​discount
​
​all fixed income are bonds, not all bonds are fixed
​market price ​price bonds traded at on market (secondary market) ​Inversely related to IR
​income

​Yield to maturity (YTM) ​return anticipated if bond held to maturity ​inverse with market price
​
​periodic return on investment same throughout the life ​Term to maturity
​of the investment (?) ​Maturity
​Fixed income Securities ​Date/years before bond expires
​aka normal bonds (?)

​doesnt pay interest (coupon)

​Noncallable bond ​issuer cannot retire bond
​traded at deep discount
​Zero-coupon bonds
​ onds Pt 1
B ​can be converted to predetermined amont of ​lower company’s cost of borrowing, offer lower ror to
​profit at maturity is when it is redeemed for its full face ​(basic concepts) ​underlying company’s equity at certain times ​investors
​value
​equity sends negative signal that shares overvalued
​convertible bond
​Eg : coupon=3% + LIBOR ​bond with variable coupon tied to a reference rate ​signallng theory
​minimise negative investor interpretation of its
​corporate actions
​ ecreases risk, normal bond with same YTM will
D
​issued for reasons
​haave higher yield (lower price) since the fixed one
​now has higher risk ​Floating Rate Bond (floater) ​protect invesors principal if projects don’t come to ​limits downside for investors
​Floating rate note (FRN) ​fruitation
​popular when IR going to increase
​lowers the sensitivity to risk ​if goes well convert to equity and benefit as well

​can be redeemed by issuer prior to maturity

​once a day/ once a year
​can change as often as issuer chooses
​Maturity ​freely callable ​call can be exercised anytime with 30/60 day notice
​tells investor how often rates adjust ​reset period
​types
​coupon=10% - EURIBOR ​deffered call ​cannot be excercised for certain period after the issue
​Inverse Floating rate bond
​variable coupon rate inversely tied to a reference rate ​(inverse Floater)
​could have negative IR when you think IR will fall ​Types of bonds ​callable bond ​payment amount

​Consumer Price Index ​Par value risese with inflation ​company do this for flexi. ​loan length
​(CPI) ​Bond IR(coupon) remains
​usually when unsure of IR companies do this
​protects investor againts inflation by guaranteeing a
​real ROR ​risk of being called back = higher coupon rate
​Inflation Protected Securities
T​ IPS ​IPS ​allows holder to force issuer to repurchase at face
T​ reasury Inflation Protected Securities ​example ​value

​not optimal for income investors ​usually IR lower than other gov/corporate securities ​price of repurchase set at time of issue (usually par)

​put bond
​not popular in countries with low/stable inflation ​less common

​Mortgage Backed securities ​loans ​bought when IR low so want to buy new bonds with
​done when IR rising sufficiently ​higher IR (coupons up)
​aircraft leases ​Leases
​life insurance
​collatarised by pool of assets
​credit card debt
​commercial banks ​short to medium term ​liquidity requirements
​Bowie bonds ​royalties ​Asset-backed Securities
​institutional 90-95% ​pension funds ​Long term
​ABS
​alternative to investing in Corporate debt
​mutual funds

​just about any cash producing situation can be

​securities into ABS ​bond investors ​Blackrock - 70% pension & insurance

​tax code

​Features affecting bonds ​favour sectors depending on ​liability structure

​segmented hypothesis

​secure (senior) ​backed by legal claim on property in case of default

​Seniority ​Unsecured bonds (debentures)

​Subordinate (junior) debentures ​riskier than the others hence cheaters (higher yield)

​>10 yrs ​Bonds

​1-10 yrs ​note

​Sovereign (Government ) bonds
​<1 year ​Bills /gilts ​do not pay coupons

​very lowe credit risk

​issuers ​States and local governments issue

​Municipal bonds
​often tax free to the residents

​corporations
​corporate bonds
​higher credit risk

​Fitch

​Agencies ​moodys

​S&P

​Bond Ratings
​have material impact on their ability to obtain debt
​finance and cost of debt finance

​changes in ratings affect bond valuations