Fixed-Income Securities - Defining Elements Part 1 Flashcards
Elements investors must know when investing
A bond’s features
Legal, regulatory, and tax considerations
Contingency provisions
Features of a bond
Issuer
Maturity
Par value
Coupon rate and frequency
Currency denomination
Yields measure
Current yield/ running yield
Yield to maturity (YTM)
Issuer
The entity that has issued the bond or the one who has borrowed money
What is the issuer responsible for
Servicing the debt (paying interest and principal payment)
Types of issuers
Supranational organisations
sovereign governments
non-sovereign government
quasi government
companies
Supranational organisations
Bonds issued by international organisations such as the World Bank and IMF
Plain-vanilla bond
Sovereign governments
Debt of national government such as government of the United States, Germany, or Italy
Non sovereign government
Bonds that are not issued by a national or central government. Instead, they are issued by state, provinces, municipalities, etc. For example, municipal bonds in the United States
Quasi government entities
Bonds issued by agencies that are financed either directly or indirectly by the government. They are also called sub-sovereign or agency bonds. For example, Ginnie Mae Fannie Mae and Freddie Mac in United States
Companies
Bonds issued by a corporate
Credit risk
The risk that interest and principal payments will not be made by the issues as they come due
All bonds are exposed to credit risk
Bonds categories under credit worthiness
Investment-grade
non-investment grade or high-yield or speculative bonds
Maturity
Maturity date is the date on which the last payment is made for a bond
The tenor of the Bond
The remaining time until maturity once a bond has been issued
Money market security
If original maturity is one year or less
Capital market security
If original maturity is more than a year
Par value
Known as face value, maturity value, or redemption value
The principal amount that is repaid to bondholders at maturity
Bond trading at a premium
If market price is greater than the par value
Bond trading at a discount
The market price is lesser than the par value
Bond trading at par
Market price is equal to par value
Coupon rate
The percentage of par value that the issuer agrees to pay to the bondholder annually as interest
Can be a fixed or floating rate
Coupon frequency
Annual
semi-annual
quarterly
monthly
Plain vanilla Bond
The most basic type of bond with periodic fixed interest payments during the bond’s life and the principal paid on maturity
Floating rate bond
The interest rate is not fixed.
Payments are based on a floating rate of interest like Libor (London Interbank Offered Rate)
a reference rate and a spread are included
Zero coupon Bond
Bonds that have only one payment at maturity
Are sold at a discount at issuance
At maturity, investors receive the par value of the bond
Currency denomination
Bonds can be issued in any currency
Dual currency bonds
Pay interest in one currency and principal and another currency
Currency option bonds
Give the bondholders the options to choose between two currencies they would like to receive their payments in
Current yield
The annual coupon divided by the bonds price and is expressed as a percentage
Yield to maturity
The internal rate of return on a bonds expected cash flow
The expected annual rate of return investing will earn if the bond is held to maturity
