Types Of Fixed Income Analysis


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Types Of Fixed Income Analysis

  2. 2. SAVINGS DEPOSITS <ul><li>COMMERCIAL BANKS </li></ul><ul><ul><li>their financial products include various fixed-income securities, and are </li></ul></ul><ul><ul><ul><li>usually insured by a federal agency, such as the Federal Deposit Insurance Corporation, known as the FDIC </li></ul></ul></ul>
  3. 3. SAVINGS DEPOSITS <ul><li>OTHER SAVINGS INSTITUTIONS: </li></ul><ul><ul><li>Savings and Loan Companies </li></ul></ul><ul><ul><li>Mutual Savings Banks </li></ul></ul><ul><ul><li>Credit Unions </li></ul></ul>
  4. 4. THE MONEY MARKET <ul><li>DEFINITION : a market for buyers and sellers of short-term (less than one year in maturity) financial products </li></ul>
  5. 5. THE MONEY MARKET <ul><li>MONEY MARKET INSTRUMENTS </li></ul><ul><ul><li>commercial paper </li></ul></ul><ul><ul><li>certificates of deposit </li></ul></ul><ul><ul><li>Bankers’ acceptances </li></ul></ul><ul><ul><li>eurodollars </li></ul></ul><ul><ul><li>repurchase agreements (repos) </li></ul></ul>
  6. 6. U.S. GOVERNMENT SECURITIES <ul><li>TYPES OF GOVERNMENT SECURITIES </li></ul><ul><ul><li>U.S. Treasury Bills </li></ul></ul><ul><ul><ul><li>issued on a discount basis </li></ul></ul></ul><ul><ul><ul><li>maturities up to 52 weeks </li></ul></ul></ul><ul><ul><ul><li>sold by auction (bid process) </li></ul></ul></ul>
  7. 7. U.S. GOVERNMENT SECURITIES <ul><li>TYPES OF GOVERNMENT SECURITIES </li></ul><ul><ul><li>U.S. Treasury Notes </li></ul></ul><ul><ul><ul><li>longer term than T-bills </li></ul></ul></ul><ul><ul><ul><li>from one to ten years </li></ul></ul></ul><ul><ul><ul><li>semiannual coupon payments </li></ul></ul></ul><ul><ul><ul><li>current owners are registered </li></ul></ul></ul><ul><ul><ul><li>issued in denominations of $1000 or more </li></ul></ul></ul><ul><ul><ul><li>active secondary market </li></ul></ul></ul>
  8. 8. U.S. GOVERNMENT SECURITIES <ul><li>TYPES OF GOVERNMENT SECURITIES </li></ul><ul><ul><li>U.S. Treasury Bonds </li></ul></ul><ul><ul><ul><li>maturities greater than ten years </li></ul></ul></ul><ul><ul><ul><li>denominations in $1,000 or more </li></ul></ul></ul><ul><ul><ul><li>some have call provisions </li></ul></ul></ul>
  9. 9. U.S. GOVERNMENT SECURITIES <ul><li>TYPES OF GOVERNMENT SECURITIES </li></ul><ul><ul><li>U.S. Savings Bonds </li></ul></ul><ul><ul><ul><li>nonmarketble and offered only to individuals </li></ul></ul></ul><ul><ul><ul><li>Series EE are pure discount bonds </li></ul></ul></ul><ul><ul><ul><li>Series HH mature in 20 years with semiannual coupon payments </li></ul></ul></ul>
  10. 10. U.S. GOVERNMENT SECURITIES <ul><li>TYPES OF GOVERNMENT SECURITIES </li></ul><ul><ul><li>Zero Coupon Treasury Security Receipts or Coupon stripping </li></ul></ul><ul><ul><ul><li>Treasury bonds are purchased and placed in trust with a custodian </li></ul></ul></ul><ul><ul><ul><li>sets of receipts issued for each coupon date </li></ul></ul></ul><ul><ul><ul><li>another set of receipts issued for certain maturity dats </li></ul></ul></ul>
  11. 11. FEDERAL AGENCY SECURITIES <ul><li>BONDS OF FEDERAL AGENCIES </li></ul><ul><ul><li>Department of Defense </li></ul></ul><ul><ul><li>Export-Import Bank </li></ul></ul><ul><ul><li>Federal Housing Authority </li></ul></ul><ul><ul><li>Postal Service </li></ul></ul><ul><ul><li>Tennessee Valley Authority </li></ul></ul>
  12. 12. FEDERAL AGENCY SECURITIES <ul><li>BONDS OF FEDERALLY SPONSORED AGENCIES </li></ul><ul><ul><li>Federal Home Loan Bank </li></ul></ul><ul><ul><li>Federal National Mortgage Association </li></ul></ul><ul><ul><li>Student Loan Mortgage Corporation </li></ul></ul><ul><ul><li>Farm Credit Bank </li></ul></ul><ul><ul><li>Resolution Funding Corporation </li></ul></ul>
  13. 13. STATE AND LOCAL GOVERNMENT SECURITIES <ul><li>ISSUING AGENCIES </li></ul><ul><ul><li>States </li></ul></ul><ul><ul><li>Special Districts </li></ul></ul><ul><ul><li>Municipalities, Counties and Townships </li></ul></ul>
  14. 14. STATE AND LOCAL GOVERNMENT SECURITIES <ul><li>TYPES OF MUNICIPAL BONDS </li></ul><ul><ul><li>General Obligation </li></ul></ul><ul><ul><li>Revenue </li></ul></ul><ul><ul><li>Industrial Development </li></ul></ul>
  15. 15. CORPORATE BONDS <ul><li>TAX TREATMENT </li></ul><ul><ul><li>How is the income from a bond treated in the tax return of the corporation? </li></ul></ul><ul><ul><ul><li>discount basis </li></ul></ul></ul><ul><ul><ul><ul><li>discount taxed as ordinary income by federal government </li></ul></ul></ul></ul><ul><ul><ul><li>coupon basis </li></ul></ul></ul><ul><ul><ul><ul><li>coupon taxed annually </li></ul></ul></ul></ul><ul><ul><ul><ul><li>interest payments by corporation considered expenses to reduce taxable income </li></ul></ul></ul></ul>
  16. 16. CORPORATE BONDS <ul><li>THE INDENTURE </li></ul><ul><ul><li>DEFININTION : a legal document formally describing the terms of the legal relationship between a bond issuer and bondholders. </li></ul></ul>
  17. 17. CORPORATE BONDS <ul><li>THE INDENTURE </li></ul><ul><ul><li>The Trustee </li></ul></ul><ul><ul><ul><li>acts to protect the interests of bondholders </li></ul></ul></ul><ul><ul><ul><li>facilitates communications between them and the issuer </li></ul></ul></ul><ul><ul><ul><li>the indenture promises the trustee that it will comply with a number of stated provisions </li></ul></ul></ul>
  18. 18. CORPORATE BONDS <ul><li>THE INDENTURE </li></ul><ul><ul><li>includes other terms such as the sale of assets, issuance of other bonds, dividends payment changes, and other issues that may change the profitability and solvency of the issuer </li></ul></ul>
  19. 19. CORPORATE BONDS <ul><li>TYPES OF BONDS </li></ul><ul><ul><li>mortgage </li></ul></ul><ul><ul><li>collateral trust </li></ul></ul><ul><ul><li>equipment obligations </li></ul></ul><ul><ul><li>debentures </li></ul></ul><ul><ul><li>income </li></ul></ul><ul><ul><li>guaranteed </li></ul></ul>
  20. 20. CORPORATE BONDS <ul><li>CALL PROVISIONS </li></ul><ul><ul><li>the option to pay off the bond at par at any time prior to maturity </li></ul></ul>
  21. 21. CORPORATE BONDS <ul><li>THE INDENTURE </li></ul><ul><ul><li>Two Kinds of Call Provisions: </li></ul></ul><ul><ul><ul><li>no calls in first five years or </li></ul></ul></ul><ul><ul><ul><li>call premium is specified in the provision at time of issue </li></ul></ul></ul>
  22. 22. CORPORATE BONDS <ul><li>SINKING FUNDS </li></ul><ul><ul><li>requires issuer to make annual payments to a fund </li></ul></ul><ul><ul><li>the fund pays part of the principal each year </li></ul></ul><ul><ul><li>trustee may also repurchase bonds in the open market </li></ul></ul>
  23. 23. FOREIGN BONDS <ul><li>WHAT CONSTITUTES A FOREIGN BOND? </li></ul><ul><ul><li>DEFINITION: foreign bonds are bond offered in another currency outside the issuers country of origin </li></ul></ul><ul><ul><li>Example: </li></ul></ul><ul><ul><ul><li>a yankee bond is a foreign bond denominated in U.S. dollars issued in the U.S. by a Canadian firm </li></ul></ul></ul>
  24. 24. PREFERRED STOCK <ul><li>DEFINITION: a hybrid form of security that has characteristics of both common stocks and bonds </li></ul><ul><ul><li>similar to a perpetual bond </li></ul></ul><ul><ul><li>receive preferential treatment before common stock in order of dividend payment </li></ul></ul><ul><ul><li>unpaid dividends usually accumulate </li></ul></ul><ul><ul><li>some are convertible to common stock </li></ul></ul>