CREDIT RESEARCH

CORPORATE BONDS

Part 1: Market Analysis

Part 2: Fundamental Analysis

PART 1
Bond Market Analysis

Bond Market Size

U.S. Bond Market

Bond markets in most countries remain
decentralized and lack common exchanges like
stock, future and commodity markets

This has occurred, in part, because no two

bond issues are exactly alike, and the number of
different securities outstanding is far
However, the New York Stock Exchange
(NYSE) is the largest centralized bond market,
representing mostly corporate bonds
The decentralized market structure of the
corporate and municipal bond markets, as
distinguished from the stock market structure,
results in higher transaction costs and less liquidity

U.S. Bond Market Debt

Outstanding
As of 30 June 2009, dollars in
billions

U.S. Treasury

$6,927.8

Agencies of the
U.S.

2,972.4

State & Municipal

2,726.8

Corporate

6,778.4

Money Market

3,430.3

Mortgage-backed

8,948.7

Asset-backed

2,533.6

Bond Indenture and Covenants

Bond indenture is a document which specifies the
promises of the borrower/issuer and the rights of
lender/bondholder. These contracts in the indenture
are know as covenants.
Affirmative Covenants
Timely payment of interest and
principal
Maintenance of certain financial
ratios
Maintain assets in working
conditions
Submit periodic reports to trustee

Negative Covenants
Restriction on asset sales
Negative pledge of collateral
Restriction of additional
borrowings

Bond Quotes
Securiti
es

Issues Prev
Name Close

CG2018 7.83%

High

(100.30 100.47
)

Low

Close

Trad
Val
Crore

No.Of.
Trade

YTM%

100.43

100.43

175

7.72%

CG2021 7.70%

99.38

99.38

99.38

25

7.91%

CG2041 8.83%

108.45

108.42

108.42

30

8.07%

LIC13

8.48%

99.71

99.71

99.71

55

8.96%

TM

2%

128.15

128.15

128.15

25

8.24%

Corporate Bond Spreads

Duration

AAA

AA

1 year

131

144

3 years

119

134

5 years

108

120

10 years

93

101

Bond Characteristics

Bond Characheristics

Price Risk & Reinvestment

Risks
Fix Rate

Fix Rate Bond

Floating Bond

Zero Cupon
Bond

Interest Rate
Risk/
Price Risk

Mid

Low

High

Reinvestment
Risk

High

Mid

Low

Option Free Bonds

Key Concepts

Price-Yield Relationships is negative slop: the price

falls as the yield rises
Duration: % change in the bond price for 1% change
in YTM
The relation follows a curve which is convex
Option free bond has positive convexity
Convexity is a good thing for a bond holder as for a
given volatility of yields price increases are larger than
it decreases when yield rises
1% drop in YTM will increase price to 110.67=10.67%
gains
1% rise in YTM will decrease price to 90.79= 9.22%
fall

Callable Bonds

Putable Bonds

Key Concepts

Yield Curve

Upward Yield Curve

InvertYield Curve

Humped Yield Curve

Upward Yield Curve

BOND RISKS

BOND RISKS

SPREADS

Concept Checkers

Concept Checkers

Concept Checkers

Concept Checkers

PART 2
Fundamental Analysis

Business risk

Country risk
Industry characteristics
Company position
Product portfolio/Marketing
Technology
Cost efficiency
Strategic and operational management
competence
Profitability/Peer group comparisons

Financial risk

Accounting
Corporate governance/Risk
tolerance/Financial policies
Cash-flow adequacy
Capital Structure/Asset Protection
Liquidity/Short-term factors

Financial Risk Indicative

Ratios

Key Industrial Financial

Ratios

Key Ratios

Ranking
Revolver (Revolving Credit Facility )
Term Loan A
Term Loan B
Senior Notes
Subordinated Notes
Convertible Preferred Stocks
Convertible Bonds
Preferred Stock

Equity

Example

Maintenance Covenants

Incurrence Covenants (Negative

Cov)