Chap 12 & 13 - Stratégie de PF: Titres à revenu fixe Flashcards
What are the 3 main segments of public debt based on a issue’s original maturity ?
- Short-term issues with maturities of 1 year or less. The market for these instruments is commonly known as the money market.
- Intermediate-term issues with maturities in excess of 1 year but less than 10 years. These instruments are known as notes.
- Long-term obligations with maturities in excess of 10 years, called bonds.
A bond can be characterized by its (1) intrinsic features, (2) type, (3) indenture provisions, or (4) features that affect its cash flows or its maturity.
1- Intrinsic Features: The coupon, maturity, principal value, and the type of ownership are important intrinsic features of a bond. The principal, or par value, of an issue represents the original value of the obligation. This is generally stated in $1,000 increments from $1,000 to $25,000 or more.
2- Types of Issues In contrast to common stock, companies can have many different bond issues outstanding at the same time. Secured (senior) bonds are backed by a legal claim on some specified property of the issuer in the case of default. Unsecured bonds (debentures) are backed only by the promise of the issuer to pay interest and principal on a timely basis. As such, they are secured by the general credit of the issuer. Subordinate (junior) debentures possess a claim on income and assets that is subordinated to other debentures.
3- Indenture Provisions: The indenture is the contract between the issuer and the bondholder specifying the issuer’s legal requirements. A trustee (usually a bank) acting on behalf of the bondholders ensures that all the indenture provisions are met, including the timely payment of interest and principal.
4- Features Affecting a Bond’s Maturity :
What is A serial obligation bond ?
A serial obligation bond issue has a series of maturity dates, perhaps 20 or 25. Each maturity, although a subset of the total issue, is really a small bond issue with generally a different coupon. Municipalities issue most serial bonds.
What is the difference between bearer bonds and registered bonds ?
With a bearer bond, the person physically holding the security is the owner, so the issuer keeps no record of ownership. Interest from a bearer bond is obtained by clipping coupons attached to the bonds and sending them to the issuer for payment. In contrast, the issuers of registered bonds maintain ownership records and pay the interest directly to the current owner of record.
What is the call premium of callable bonds ?
Callable bonds have a call premium, which is the amount above par value that the issuer must pay to the bondholder for prematurely retiring the bond.
What are some of the most important bonds provisions ?
1- A freely callable provision that allows the issuer to retire the bond at any time with a typical notification period of 30 to 60 days.
2- A noncallable provision wherein the issuer cannot retire the bond prior to its maturity.
3- Adeferred call provision, in which the issue cannot be called for a certain period of time after its issue (for example, 5 to 10 years and then becomes freely callable).
4- A nonrefunding provision prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon refunding bond. An issue with a nonrefunding provision can be called and retired prior to maturity using other sources of funds, such as excess cash from operations, the sale of assets, or proceeds from a sale of common stock.
5- The sinking fund, which specifies that a bond must be paid off systematically over its life rather than only at maturity. The size of the sinking fund can be a percentage of a given issue, a percentage of the total debt outstanding, or a fixed sum stated on a dollar basis.
What are the 5 different categories of bonds for each currency ?
(1) Sovereign bonds (for example, the U.S. Treasury)
(2) Quasi- and foreign governments (including agency bonds): 2 type of Subdivisions of gouv. : government-sponsored enterprises and federal agen cies. Foreign government issues are typically not denominated in its own currency (for example, a Japanese government issue denominated in dollars and sold in the United States).
(3) Securitized and collateralized bonds from governments or corporations: These can be either government agencies or corporate issues that are backed by cash flow from a portfolio of other assets, such as mortgages or car loans.
(4) Directly issued corporate bonds
(5) High-yield and emerging market bonds: Noninvestment grade from corporations in developed countries, and government or corporate issues from emerging market countries such as China and India, where the bonds can be either investment grade or high yield (noninvestment grade).
What is a split rating ?
This happens when one of the three main rating agencies for bonds have a different opinion on a certain credit rating and therefore differs from the conclusions of the other ratings.
The agencies modify the ratings with and signs for Fitch and S&P or with numbers (1-2-3) for Moody’s. As an example, an A (A1) bond is at the top of the A-rated group, while A (A3) is at the bottom of the A category. The top four ratings—AAA (or Aaa), AA (or Aa), A, and BBB (or Baa)—are generally considered to be investment-grade securities. The next level of securities, known as speculative bonds, includes the BB- and B-rated obligations. The C categories are generally either income obligations or revenue bonds. In the case of D-rated obligations, the issues are in outright default, and the ratings indicate the bonds’ relative salvage values. Bonds rated below investment grade are also referred to as high-yield, or “junk,” bonds.
Short-term T-bills differ from notes and bonds in that they are sold at a discount from par to provide the desired yield. The return is the difference between the purchase price and the face value at maturity. In contrast, government notes and bonds pay semiannual coupons through their maturity dates.
How does gouv. bonds, notes and bills pricing differs from short-term bills ?
1- Ex: The ask price is actually 102-28/32, or 102.875 percent of par. These quotes also are notable in terms of the bid–ask spread, which typically is one 32nd or less. This small spread reflects the outstanding liquidity and low transaction costs for Treasury securities.
2- Short-term bills: Quoted on a discount yield basis rather than on a price basis. So, for the bill that matures on June 21, 2018 (a one-year bill shown as the fourth entry), the ask discount rate of 1.205 percent would be the basis for the amount the investor would subtract from the bill’s face value of 100 (as a percentage of par) to determine the current price.
How does Treasury Inflation-Protected Securities (TIPS) work ?
Because the actual level of inflation is generally not known immediately, the index value used has a built-in three-month lag. For example, for a bond issued on June 30, 2011, the beginning base index value used would be the CPI value as of March 30, 2011. Following the issuance of a TIPS bond, its principal value is adjusted every six months to reflect the inflation since the base period. In turn, the interest payment is computed based on this adjusted principal—that is, the interest payments equal the original coupon times the adjusted principal.
TIPS can mathematically help to calculate the implied inflation rate: For example, if we assume that when this bond was issued on July 15, 2008, it sells at par for a yield of 3.50 percent, while a nominal Treasury note of equal maturity is sold at a yield of 5.75 percent. This differential in promised yields (5.75 3.50) implies that investors expect an average annual rate of inflation of 2.25 percent during this five-year period. If, a year later, the spread increased to 2.45 percent, it would indicate that investors expect a higher inflation rate during the subsequent four years.
Municipalities in the United States issue two distinct types of bonds: general obligation bonds and revenue issues. General obligation bonds (GOs) are essentially backed by the full faith and credit of the issuer and its entire taxing power. Revenue bonds, in turn, are serviced by the income generated from specific revenue producing projects of the municipality, such as bridges, toll roads, hospitals, municipal coliseums, and waterworks. Revenue bonds generally provide higher returns than GOs because of the higher default risk that occurs if a municipality fails to generate sufficient income from a project designated to service its obligations.
As Feldstein, Fabozzi, Grant, and Ratner (2012) note, the most important feature of municipal obligations is that the interest payments are exempt from federal income tax and from taxes for some states in which the bond was issued.
A significant feature of the U.S. municipal bond market is municipal bond insurance, wherein an insurance company will guarantee to make principal and interest payments in the event that the issuer of a bond defaults. The insurance is placed on the bond at date of issue and is irrevocable over the life of the issue. (Increase in credit rating and more liquidity)
What is an asset-backed security ?
This is an important concept because it substantially increases the liquidity of these individual debt instruments, whether they be car loans, credit card debt, student loans, or home equity loans.
What are Certificates for automobile receivables (CARs) ?
Certificates for automobile receivables (CARs) are securities collateralized by loans made to individuals to finance the purchase of cars. These auto loans can either be direct loans from a lending institution or indirect loans that are originated by an auto dealer and sold to the ultimate lender.
What are Credit card–backed securities ?
Credit card–backed securities are the fastest-growing segment of the ABS market and differ from mortgage-backed and car loan-backed securities in that the principal payments from credit card receivables are not paid to the investor but are retained by the trustee to reinvest in additional receivables.
What are Original issue discount (OID) bonds ?
Original issue discount (OID) bond, where the coupon is set substantially below the prevailing market rate—for example, a 3 percent coupon on a bond when market yields are 8 percent. As a result, the bond is issued at a deep discount from par value.
What is the difference of foreign bonds and Eurobonds ?
Foreign bonds are issues sold primarily in one country and currency by a borrower of a different nationality. An example would be U.S. dollar–denominated bonds sold in the United States by a Japanese firm. (These are called Yankee bonds.) Eurobonds are bonds underwritten by international bond syndicates and sold in several national markets. An example would be Eurodollar bonds, which are securities denominated in U.S. dollars and sold to investors outside the United States.