1. BOND MARKET IN THE
WORLD

2. ASSET CLASSES
Fixed Alternative
Equities Income Asset
Securities Classes

3. FIXED INCOME SECURITIES
It is a financial obligation of an entity that promises
to pay a specified sum of money at specified future
dates.
 Entity promising to make payment is called the
issuer of the security.

4. Contd…
FIXED INCOME
SECURITIES
Preferred Stock Debt Obligations
Mortgage Asset Bank
Bonds Backed Backed Loans
Securities Securities

5. BONDS
 Bonds are debt instruments in which one party lends money
to another party on predetermined terms.
 Terms
Rate of interest to be paid
Periodicity of payments
Repayment of principal amount borrowed

6. FEATURES
 Indenture
A document where the promises of issuer and rights of bond
holder are set forth in detail is called indenture
 Covenants
Affirmative covenants: Activities that borrower promises to do.
Negative covenants : Set forth the restrictions on borrowers
activities

7. Contd….
 Principal
It is the amount borrowed and also known as Par Value or
Face Value of the bond
Bond traded below par value -trading at a discount
Bond traded above par value- trading at a premium
 Coupon Rate
Interest rate that issuer agrees to pay
It is represented as percentage of par value
Coupon = Coupon Rate * Par value

8. Above par value
premium
Below par value Par value
discount
Bond
Bond

9. Contd….
Maturity
 Short Term Bonds
 Intermediate Bonds
 Long term Bonds
 Why Maturity is important?
Term to maturity indicates the time period over which
bond holder can expect to receive interest.
It indicates the no. of years before the principal will be paid in full
Yield on bonds depends on term to maturity

10. TYPES OF BONDS
 Zero Coupon Bonds
These bonds are not contracted to make periodic coupon
payments
These are sold at discount and interest is the difference
between the par value and price paid for the bond
 Step-Up-Notes
They have the coupon rate that increases over time
Coupon Rate steps up and as such are called step up notes
When only one change- Single Step Up Note
When more than one change- Multiple Step Up Note

11. Contd….
 Deferred Coupon Bonds
Interest payment is deferred for specified number of years.
Interest payments that are made after the deferred period
are higher than the interest payments that would have been
made had the issuer not deferred the interest payments.
 Fixed Rate Securities
They provide fixed interest payment at each period for
certain number of years upto maturity.

12. Contd….
 Floating Rate Securities/ Variable-Rate Securities
Coupon Rate= Reference Rate + Spread/Quoted Margin
 CAP and FlOOR
 Range Notes
 TIPS( Treasury Inflation Protection Securities)
U.S Dept of the Treasury in January 1997 began issuing inflation
adjusted securities known as TIPS. Reference rate is the rate of
inflation.

13. Contd….
 Inverse Floaters
The issues whose coupon rate moves in opposite direction
from the change in reference rate.
It gives investor who believes that interest rates will
decline an opportunity to obtain a higher coupon rate.
 Callable Bonds
Issuer of the bond can alter the tenor of bond by redeeming it
before maturity.
The call option provides the issuer the option to redeem a bond,
if interest rates decline, and re-issue the bonds at a lower rate.
It carries an added set of risk to the investor.

14. Contd….
 Puttable Bonds
Investor has the right to ask for redemption of bonds before
maturity.
It carries added risk to the issuer of the bond.
 Convertible Bonds
A convertible bond provides the investor the option to convert
the value of the outstanding bond into equity of the borrowing firm,
on pre-specified terms.
Redemption of bond prior to maturity and replacement with
equity.
Conversion price and conversion ratio are specified in indenture.

15. YIELD
RETURN TO INVESTOR IN BOND =
Coupon, Return from reinvestment of coupons
and capital gain or loss from selling or
redeeming bonds.
 Yield is calculated by comparing cash inflows with cash
outflows of the investor.

16. VARIOUS INTERPREATATIONS
 CURRENT YIELD
Current Yield = Annual Coupon Receipts/ Market Price of bond
 Does not consider time value of money and complete series of
expected future cash flows
 For example, if a 12.5% bond sells in the market for Rs. 104.50,
current yield will be computed as
Current Yield= (12.5/104. 5) * 100 = 11.96%
 Current Yield is no longer used as a standard yield measure,
because:
• It fails to capture the future cash flows, re-investment income and
capital gains/losses on investment return.
• It is considered a very simplistic and erroneous measure of yield.

17. Contd….
 Yield To Maturity
 Given a pre-specified set of cash flows and a price, the YTM of a
bond is that rate which equates the discounted value of the future
cash flows to the present price of the bond. It is the internal rate of
return of the valuation equation.
• For example, if we find that an 11.99% 2009 bond is being issued at
a price of Rs. 108 in 2000, we can state that,
108 = 5.995/(1+r) + 5.995/ (1+r)2 +……….105.995/(1+r)18
The value of r that solves the above equation can be found to be
5.29%,which is the semi-annual rate. The YTM of the bond is 10.58%.
• Yield to maturity represents the yield on the bond, provided the
bond is held to maturity and the intermittent coupons are re-invested
at the same YTM rate.

18. YIELD PRICE REALTIONSHIP
 Value of bond
P =C1/ (1+r) + C2 / (1+r)2 +…….Cn/ (1+r )n
where P is the value of bond and C1, C2 ….Cn are cash flows
expected from bond over n periods and r is the required rate of
return for discounting cash flows.
 Yield and price are inversely related
Price of the bond changes in opposite direction from change in
the required yield.

20. PRINCIPLES
 Price-yield relationship between bonds is not a straight line, but is
convex. This means that price changes for yield changes are not
symmetrical, for increase and decrease in yield.
 The sensitivity of price to changes in yield in not uniform across
bonds. Therefore for a same change in yield, depending on the kind
of bond one holds, the changes in price will be different.
 Higher the term to maturity of the bond, greater the price
sensitivity. Price sensitivities are higher for longer tenor bonds,
while in the short-term bond, one can expect relative price stability
for a wide range of changes in yield.
 Lower the coupon, higher the price sensitivity. Other things
remaining the same, bonds with higher coupon exhibit lower price
sensitivity than bonds with lower coupons.

21. YIELD CURVE
 Yield curve is drawn from the YTM of bonds.
 When we obtain a plot of these relationships between YTMs
and term of bonds, functional relationship between time and
yield can be identified by fitting a curve through plotted
points.

22. YIELD CURVE FROM A SAMPLE OF TRADED
BONDS
Name Coupon Maturity Term To Price YTM
(%) Date Maturity (%)
CG2001 11.75 25-Aug-01 0.41 101 0.090924
CG2002 11.15 9-Jan-02 0.78 102.75 0.074125
CG2003 11.1 7-Apr-03 2.02 103.515 0.091537
CG2004 12.5 23-Mar-04 2.98 108.31 0.092473
CG2005 11.19 12-Aug-05 4.37 106.19 0.094220
CG2006 11.68 10-Apr-06 5.03 107.58 0.097364
CG2007 11.9 28-May-07 6.16 109.31 0.098426
CG2008 11.4 31-Aug-08 7.42 107.6 0.099240
CG2009 11.99 7-Apr-09 8.02 109.18 0.102808
CG2010 11.3 28-July-10 9.33 106.6 0.101823
CG2011 12.32 29-Jan-11 9.83 110.97 0.104987
CG2013 12.4 20-Aug-13 12.39 111.2 0.107401

24. RISKS ASSOCIATED WITH BONDS
 Interest rate risk
 Coupon Rate= Yield required by market
Price =Par value
 Coupon Rate< Yield required by market
Price< Par value(discount)
 Coupon Rate> Yield required by market
Price> Par Value (premium)

25.  Call and Repayment Risk
 The cash flow pattern of a callable bond is not known with
certainty because it is not known when the bond will be called.
 Investor is exposed to reinvestment risk.
 Reinvestment Risk
 Suppose an investor purchases 20-year bond with a yield of
6%, to realize the yield of 6% every time a coupon interest
payment is made, it is necessary to reinvest the payment at an
interest rate of 6% until maturity.
 The risk that coupon payments will be invested at less than
6% is reinvestment risk.

26.  Default Risk
 Risk that issuer will fail to satisfy the terms of the obligation
with respect to the timely payment of interest and principal.
 The percentage of a population of bonds that is expected to
default is called default rate.
 If an default occur, this does not mean that investor will lose
entire amount invested. He can expect to recover a certain
percentage of the investment called recovery rate.

27. GLOBAL BOND MARKETS
BOND MARKET
SECTOR
INTERNAL BOND EXTERNAL BOND
MARKET MARKET
DOMESTIC FOREIGN
BOND BOND
MARKET MARKET

28. Contd….
INTERNAL BOND MARKET
 It is also called as national bond market
 It includes domestic bond market and foreign bond market
 DOMESTIC BOND MARKET
It is where the issuers domiciled in the country issue bonds and
where those bonds are subsequently traded.
 FOREIGN BOND MARKET
It is where the issuers not domiciled in the country issue bonds
and where those bonds are subsequently traded.

29. Contd….
 Bonds traded in U.S Foreign Bond Market are termed as YANKEE
BONDS
 Foreign Bonds in U.K are termed as BULLDOG BONDS
 In Japan Yen denominated bonds are issued by British Corporation
and subsequently traded in Japan’s bond market is a part of Japanese
Foreign Bond Market and is nicknamed as SAMURAI BONDS
 Bonds traded in Netherlands Foreign Bond Market are termed as
REMBRANDT BONDS
 Bonds traded in Spain Foreign Bond Market are termed as
MATADOR BONDS

30. Contd….
Issuers of Foreign Bonds
 Central Governments and their subsidiaries
 Corporations
 Supranationals: An entity formed by two or more Central
Governments through international treaties.
International Bank For Reconstruction And Development
Inter-American Development Bank

31. Contd….
EXTERNAL BOND MARKET
 It is also called as International Bond Market, The Offshore Bond
Market, or, The Euro Bond Market
 These bonds are underwritten by an international syndicate.
 At issuance, they are offered simultaneously to investors in number
of countries.
 They are issued outside the jurisdiction of any single country.
 They are in unregistered form.
 They are classified based on the currency in which they are
denominated.
 Euro Bonds denominated in U.S dollars- Eurodollar bonds
 Euro Bonds denominated in Japanese Yen- Euroyen bonds.
 A Global Bond is one that is issued in several bond markets
throughout the world.

32. CLASSIFICATION IN TERMS OF
TRADING BLOCS
 DOLLAR BLOC
It includes United States, New Zealand, Canada and Australia.
 EURO BLOC
It includes Euro Zone Market Bloc and Non- Euro Zone Market
Bloc.
Euro Zone Market Bloc: Which has the common currency, Euro.
Germany, France, Holland, Belgium, Austria, Italy, Spain
Finland, Portugal, Greece.
Non- Euro Zone Market Bloc: Norway , Denmark and Sweden
 Japan
 Emerging Markets

33. NON-U.S SOVEREIGN BOND
ISSUERS
 GERMAN GOVERNMENT
BUNDS: Maturities of 8-30 years
BUNDESOBLIGATIONEN, BOBLS: Notes with maturity of 5
years
These have fixed-rate coupons and are bullet structures
Ten year Bunds are the largest sector of German
government securities

34. Contd….
 UNITED KINGDOM
GILT – EDGED STOCKS or GILTS:
Largest sector of the gilt market is straight fixed rate coupon
bonds.
Second major sector is index-linked issues-LINKERS.
Issues of outstanding gilts called IRREDEMABLES.
Issues with no maturity date called UNDATED GILTS.

35. Contd….
 FRENCH TREASURY
OBLIGATION ASSIMILABLE DU TRESOR(OATS)
Long dated bonds with maturities upto 30 years
They are not callable
Mostly have fixed-rate coupon
BONS DU TRESOR A TAUX FIXE A INTERET
ANNUEL (BTANs)
Notes with maturities between 2 and 5 years

36. Contd….
 ITALIAN GOVERNMENT
BUONI DEL TRESORO POLIENNALI(BTPs)
Bonds with fixed rate coupon that are issued with maturities of
5,10 and 30 years.
CERTIFICATI DI CREDITO DEL TRESORO(CCTs)
Floating rate notes with 7 year maturity
CERTIFICATI DI TRESORO A ZERO COUPON( CTZs)
2 year Zero coupon notes
CERTIFICATI DEL TRESORO COB OPZIONE(CTOs)
Bonds with put option

37. Contd….
 CANADIAN GOVERNEMNT
Bonds have fixed coupon rate except for the inflation
protection bonds(Real return bonds)
 AUSTRALIAN GOVERNMENT
About three-quarters consists of fixed rate bonds and
inflation protection bonds called “Treasury indexed bonds”
The balance of the market consists of floating rate issues
called as “Treasury adjustable bonds” that have a maturity
between 3to 5 years and the reference rate is the Australian
Bank Bill Index.

38. Contd….
 JAPANESE GOVERNMENT SECURITIES(JCBs)
Two types:
 Medium term bonds
Bonds with coupons ( maturities of 2,3 and 4 years)
Zero coupon bonds
5 year zero coupon bond
 Long dated bonds are interest bearing

39. Contd….
 EMERGING MARKETS
 Financial markets of Latin America, Asia(except Japan) and
Eastern Europe are viewed as emerging markets.
 Investing in government bonds of emerging market countries
are more risky than that of industrialized countries.

40. HOW TO READ A BOND TABLE
Column 1: Issuer - This is the company, state (or
province) or country that is issuing the bond.
Column 2: Coupon - The coupon refers to the
fixed interest rate that the issuer pays to the
lender.
Column 3: Maturity Date - This is the date on
which the borrower will repay the investors their
principal.
Column 4: Bid Price - This is the price someone
is willing to pay for the bond. It is quoted in
relation to 100, no matter what the par value is.
Column 5: Yield - The yield indicates annual
return until the bond matures. Usually, this is the
yield to maturity, not current yield. If the bond is
callable it will have a "c--" where the "--" is the
year the bond can be called. For example, c10
means the bond can be called as early as 2010