Beruflich Dokumente
Kultur Dokumente
Securities
Debt Obligation
Maturity
It is the number of years remaining for the final
principal payment.
Reasons for importance of Bond maturity:
1. It indicates the time span for which the
bondholder will get the interest on bond.
2. Yield offered on bond is dependent on the term
of maturity.
3. Price volatility of a bond is a function of its
Note:
maturity.
Longer the maturity of bond, greater will be the price
volatility resulting from changes in interests rates.
Par Value
It is the amount the issuer agrees to repay to the
bondholder on the maturity date. It is also termed
as face value, maturity value, redemption value, or
principal.
Facts:
1. Bonds can have different par value.
2. Price of the bond is quoted as a percentage of its
par value. For e.g. If the par value of a bond is
Rs.1000 and it said to be selling at 90, it means
that price of the bond is 90% of Rs.1000 i.e.
Rs.900.
3. A bond may trade above (premium) or below
5
(discount) its par value.
Coupon Rate
Coupon Rate: It is the interest rate that the issuer
of the bond agrees to pay each year to the
bondholder.
Coupon: It is the amount of interest paid by the
issuer every year to the bondholder.
Calculation of coupon:
Coupon = Coupon Rate x Par Value.
Note:
While describing a bond of an issuer, the coupon rate is mentioned
along with the maturity date.
For e.g. 7 of 01/04/2020 trading at 94 means that a bond with coupon rate of 7% and maturity date of 01/04/2020 is trading at 94% of its par
value.
Higher the coupon rate, lower is the risk of decrease in price in response to a change in interest rates.
Coupon Rate
Zero coupon bonds
These bonds are not contracted to make periodic
coupon payments.
Holder purchases the bond at a price lower than the
par value and the interest is the difference between
the par value (which he gets at the maturity date)
and the purchase price.
Step-Up Notes
These are securities whose coupon rate increases
over time.
If only one change in coupon rate, it is known as
single step-up note. If more than one change in
coupon rate, it is known as multi step-up note.
7
Coupon Rate
Deferred Coupon Bonds
Interest payments are deferred for a specified number of
years.
Periodic interest payment after the deferred period till the
bond maturity.
Interest payments post the deferred period is higher than
the promised interest payment as to compensate the loss of
interest payment in deferred period.
Floating-Rate Securities
In these type of securities, the coupon rate is not fixed and
varies according to some reference rate.
Coupon Rate = Reference rate + Quoted Margin (can be
positive or negative).
E.g. Coupon Rate = 1-month LIBOR + 50 basis points. If 1month LIBOR is 6%, then the coupon rate is 6.5%.
8
11
Accrued Interest
Facts:
Interest on bonds is paid in many mode i.e.
annually, semi-annually etc.
For mortgage and asset backed securities, interest
is usually paid monthly.
Coupon is paid on the coupon date to the
bondholder of record.
The seller gives up the interest from the time of
the last coupon payment to the time until the bond
is sold. The amount of interest over this period
that will be received by the buyer even though it
was earned by the seller is called accrued interest.
12
Accrued Interest
In many cases, the buyer of the bond has to pay
the accrued interest to the seller. The amount
that the buyer of the bond pays to the seller is
the agreed upon price for the bond plus accrued
interest and is known as Full Price.
A bond in which the buyer of the bond has to pay
the accrued interest to the seller is said to be
trading cum-coupon (with coupon).
A bond in which the buyer of the bond forgoes the
next coupon payment, the bond is said to be
trading ex-coupon (without coupon).
13
14
2. Prepayments:
Any principal payment prior to the principal payment
date is known as prepayment. It is an option that can be
availed by the borrower.
15
Other Features
Conversion Privilege:
This is a privilege with the bondholder to convert the
bond for a specified number of shares of common
stocks. The bond is called convertible bonds.
It allows the bondholder to take advantage of favorable
price movements in the price of issuers common stock.
Put Provision:
This provision gives the right to the bondholder to sell
back the issue to the issuer at a specified price on
specified dates.
Currency Denomination:
The transaction between the issuer and the bondholder
can be in any currency provided it is mentioned in the
indenture that the issuer can make payment in any
currency.
17
Repurchase commitment:
A sale of securities with a commitment by the seller
to repurchase the same security back from the
purchaser at a specified price on a specified date.
18
Thank You
19