Chapter 5 Flashcards
are roughly equally split between government and corporate bonds
bonds
Are issued by national governments and by supranational agencies such as the bank of america and the world bank
Government bonds
Are issued by companies such are as large banks and other large corporate listed companies like san miguel corporation
Corporate bonds
It can be seen in a bond certificate
issuer
maturity or redemption
face value, par or principal
coupon
Are commonly referred to as a loan stock, debt or fixed interest securities
bonds
The feature that distinguishes a bond from most loans is that a bond is
tradable
The six terms that can be seen in the table
nominal
stock
coupon
redemption date
price
value
This is the amount of stock purchase and should not be confused with the amount invested or the cost of purchase
nominal
This is the amount on which the interest will be paid and the amount that will eventually be repaid
nominal
It is also known as the par or face value of the bond
nominal
It represents us government bonds issued with relatively long periods to maturity
treasury bond
This is the amount of interest paid per year expressed as percentage of the face value of the bond
coupon
This is the date at which the issue expires and the lender will repay the borrower the sum borrowed
Redemption date
Redemption date is also known as the
Maturity date
Bonds generally have default risk and price risk
bonds
The inverse relationship between interest rates and bond prices
If interest rates increase bond prices will decrease and if interest rates decreased bond prices will increase
Other main types of risk associated with holding bonds
early redemption
seniority risk
inflation risk
liquidity risk
exchange rate risk
The risk that the issuer may invoke a call provision and redeem the bond early
Early redemption
This relate to the seniority with which corporate debt is rank in the event of the issuer’s liquidation
seniority risk
The risk of inflation rising unexpectedly and eroding the real value of the bonds coupon and redemption payment
inflation risk
Is the ease with which a security can be converted into cash
liquidity
Bonds denominated in a currency different from that of the investors home currency are potentially subject to adverse exchange rate movements
Exchange rate risk
The three most prominent credit rating agencies are
standard and poor
moody’s
fitch ratings
Bond issues subject to credit ratings can be divided into two distinct categories
Those accorded an investment grade rating and those categorized as non-investment grade or speculative
Is also known as high yield or for the worst rated junk bonds
Non-investment grade
It offer the greatest liquidity and certainty of repayment,
Investment-grade
Government bond markets
US
UK
Germany
France
Japan
Primary Market Issuance
These government bond market is the largest and most liquid in the world
US
Government bonds issued by the us government are generally known as
Treasuries
Treasuries have four main marketable types
treasury bills
treasury notes
treasury bonds. treasury inflation protected securities
A money market instrument used to finance the government’s short-term borrowing needs
Treasury bills
They are zero-coupon instruments that pay no interest and instead are issued at a discount to their maturity value
Treasury bills
They have maturities of less than a year and are typically issued with maturities of 28 days 91 days and 182 days
Treasury bills
Conventional government bonds that have a fix coupon and redemption date
Treasury notes
They have maturity dates ranging from more than one year to not more than 10 years from the issue date
Treasury notes
Again conventional government bonds but with maturities of more than 10 years from their issue date most commonly issued with maturities of 30 years
Treasury bonds
These are index link bands and are referred to as the TIPS
Treasury inflation protected securities
STRIPS
Separate trading of registered interest and principal securities
These are also traded based on this trip elements of treasury notes bonds and tips
Strips
These are traded for settlement the next day
US treasuries
Some of the biggest issuers of bonds are
Fannie Mae
Freddie Mac
These are issued by states cities countries and other government entities to raise money to build schools highways hospitals and sewer systems as well as many other projects
municipal bonds
Interest is usually paid semi-annually and many are exempt from both federal and state taxes
Municipal bonds
Uk government bonds are known as
gilts
These are instruments that carry a fixed coupon and a single repayment date such as 5% treasury gilt 2025
Conventional government bonds
This type of bond represents the majority of government bonds in issue
Conventional government bonds
Are bonds were the coupon and the redemption amount are increased by the amount of inflation over the life of the bond they are similar to the us tips
index - linked bonds
Uk government stocks are classified into the following
0-3 years remaining ultrashort dated
3- 7 years remaining short dated
7-15 years remaining medium dated
15 years and over remaining long dated
The main types of german government bonds are
bunds
schatz
bobls
are longer term instruments
bunds
are issued with 2 year maturities
schatz
are issued with 5 year maturities
bobls
Are issued with maturities of between 8 and 30 years but the most common maturity is 10 years
bunds
This market is large and liquid and the yield on bunds set the set the benchmark for other european government bonds
bunds market
It settle two business days after trade date
domestic trades
is made up of longer term instruments knows as OATS and shortdated stocks known as BTANs, which have maturities up to five years
French government debt
Trading in OATS in both the domestic and international market is for
T +2 two business days later
Trading in BTANs is
T+1 in domestic market
T +2 in international settlement
This bond market is one of the largest in the world and its bonds are usually referred to as JGBs
Japanese government bonds
Japanese government bonds are classified into six categories
Short-term bonds
medium term bonds
long-term bonds
super long-term bonds
individual investor bonds
inflation indexed bonds
Japanese government bonds have maturities as follows
Fixed rate coupon bearing bonds - 2,5 10,20,30 40 years
Inflation-indexed bonds - 10 years
Floating rate bonds - 15 years
JGBs for retail.investors - 3, 5, 10 years
It operate in a similar way to TIPS that is the principal amount is inflation adjusted based on movements in the cpi and the coupon is fixed but payable in the inflation-adjusted principal amount
Inflation indexed bonds
Government bonds are usually issued through agencies that are part of the country’s treasury department
Primary market issuance
Are typically made in the form of an action or large investors submit competitive bids
issues
The issuer’s for the government bonds described above are as follows
US: Bureau of the Fiscal Service
UK:Debt Management Office
Germany : Finanzagentur GmbH
France : Agence France Tresor
Japan: Ministry of Finance
Is bond that is issued by a company as the name suggests
Corporate bonds
The term is usually applied to longer-term debt instruments with a maturity date of more than 12 is used for instruments with a shorter maturity
Corporate bonds
is used for instrument with a shorter maturity
commercial paper
features of corporate bonds
bond security
redemption provisions
Usually means some form of charge over the issuers assets so that if the issuer defaults the bondholders have a claim on those assets before other creditors
security
The security offered may be
fixed or floating
It implies that specific assets of the company or charge as security for the loan
fixed security
It means that the general assets of the company are offered as security for the loan this might include cash at the bank trade debtors or stock
floatingcharge
It gives the issuer the option to buy back all or part of the issue before maturity
call provision
These give the band holder the right to require the issuer to redeem early on a set date or between specific dates
put provisions
types of corporate debt
medium-term notes
fixed rate bonds
floating rate notes
convertible bonds
zero coupon bonds
are standard corporate bonds with maturities ranging usually from 9 months to 5 years though the term is also applied to instruments with maturities as long as 30 years
medium term notes
They have fixed coupons which are paid either half-yearly or annually and predetermined redemption dates
fixed rate bonds
Are bonds that have variable rates of interest
floating rate notes
This is the rate of interest at which banks will land to one another in london and is often used as a basis for financial instrument cash flows
London interbank offered rate (LIBOR)
are issued by companies and they give investor holding the bond two possible choices
convertible bonds
Is a bonds that pay no interest
Zero-coupon bonds
Is an alternative term for the interest payment on a bond
coupon
These are bundled securities so cold because they are marketable securities that result from the bond length or packaging together of a set of non marketable assets
asset backed securities
Are created by bonding together a set of mortgages and then issuing bonds that are backed by these assets
mortgage backed bonds
These bonds are sold on the investors who receive interest payments until they are redeem
mortgage backed bonds
Creating a bond in this way is known as… and it began in the us in 1970 when the government first issued mortgage certificates is security representing ownership of a pool of mortgages
securitization
international bonds
domestic and foreign bonds
eurobonds
Is issued by a domestic issuer into the domestic market
domestic bond
Is issued by an overseas entity into a domestic market and is denominated in the domestic currency
foreign bond
Are large international bond issues often made by governments and multinational companies
eurobonds
Is one denominated in sterling and issued outside the uk though not necessarily in a european financial center
euro sterling bond issue
Are a measure of the returns to be earned on bonds
yields
The interest paid on a bond as a percentage of its market price is referred to as the
flat or running yield
Is calculated by taking the annual coupon and dividing by the bonds price and and multiplying by 100 to obtain a percentage
flat yield
Is a measure that incorporates both the income and capital return assuming the investor holds the bond until its maturity into one figure
redemption yield
