BOND Flashcards
What is the basic features of a bond ?
- Fixed income issues
- Coupon (PMT)
- Term to Maturity
- Principal or Par Value (FV)
- Interest (I/YR)
-Present Value (PV)
what is the types of fixed income issues?
- Short term issues :
maturity one year or less
Market : money market - Intermediate term issues :
maturity in excess one year but less than 10 years
Known as notes - Long term obligations
maturities in excess 10 years
called bonds
Elaborate the bonds features
-Coupon (PMT) : The income which will be receive over the life/ Interest income or coupon income
-Term of Maturity : Date or number of years
-Principal or par value : original value of the obligation, always 1,000
-Interest I/YR : Interest bond by the issuer bond
-Present value (PV) : current price
Factors influencing bond’s risk
-Interest rate : interest rate increase, the bond price will decrease
- Purchasing power : If the inflation decrease unexpectedly, the interest rate income will be unattractive
- Business : the chances of defaulting
- Liquidity: Risk of difficultness to sell the bond
- Callable : the chances that the risk will be retired before maturity
Types of issues for bond
Secured bonds : backed by legal claim on some specified property
Eg. mortgage bonds, equipment trust certificates
Unsecured bonds (debentures) : backed only by the promise of the issuer to pay interest and principal
Subordinate (Junior) debentures : claim on income and assets that is subordinated to the other debentures
Income bonds : Interest is paid only if earned
Types of bonds in Malaysia
- Government
- Corporate
Features affecting a bond’s maturity
- Call features : freely callable, noncallable, and deferred call, call premium (the issuer’s right to redeem or “call back” the bond before its scheduled maturity date)
- Nonrefunding provisions : prohibits a call and premature retirement of an issue from the proceeds (it means the issuer is restricted from redeeming the bond or issuing a new bond to repay the existing bondholders before the stated maturity date)
- Sinking fund : specifies that a bond must be paid systematically over its life (it means the issuer is obligated to make scheduled payments into the sinking fund account, typically on an annual or semi-annual basis)
Describe the bond ratings
- It is rated by professional analyst
- Three major rating agencies : moody’s, standard and poor’s and fitch investors services
- Description of bond ratings : Investment-grade securities, speculative bonds, Income obligations
How to quote a bond prices
- Bond is quotes as percentage at par (85% at 1000 par : $850)
- Corporate bond are quoted at 1/8 at a price of 90.125 or $90.125
- Government bond are quoted at 1/32 increments
Factors influencing Interest Rate Movement
- Expected Inflation
- Changes in Money Supply
- Government policies
- Level of economic activity
- Interest rate in major foreign market
What type of bonds yield
- Current yield
- Yield to maturity (YTM)
- Yield to call (YTC)
How to calculate current yield?
- Annual Interest Income/current market price of the bond
What is yield to maturity ?
- Rate of return that investors earn if they buy a bond at a specific price and hold it until maturity
- its equal to its par value will always equal to the coupon interest rate
- when the bond value differs from the par, the YTM will differ from the coupon interest rate
What is yield to call ?
- Like yield to maturity
- Assumes bond will be called on the first call date
- Uses bonds call price (premium) instead of par value
- True Yield received if bond is held to call
What is a bond duration
- a measure of bond price volatility, which captures both price and reinvestment risk
used to indicate how a bond will react in different interest rate environment - It is the average amount of time that it takes to be repaid a bond’s price by the bond’s total cash flows
- Used to measure the sensitivity of the bond prices to changes in interest rate
- Bond durations : better indicator than bond maturity of impact interest rate on bond price (price volatility) - (IR UP, HOLD BONDS DURATIONS DOWN) - (IR DOWN, HOLD BONDS DURATION LONG)
- TWO TYPES OF DURATIONS : MACAULAY, AND MODIFIED
