CSI Global Education Inc. Investment Products CHAPTER 6:  Fixed-Income Securities: Features and Types
Chapter Highlights <ul><li>Corporations and governments borrow for a variety of reasons: </li></ul><ul><ul><li>finance fut...
Debt or Fixed-Income Securities  <ul><li>A type of security that promises to pay the lender rent (“interest”) and returns ...
Rationale Behind Issuance of Debt <ul><li>Matching term of assets with term of liabilities </li></ul><ul><li>Use of financ...
Bond Features <ul><li>Coupon Rate </li></ul><ul><li>the expressed rate of interest income paid by the issuer </li></ul><ul...
Bond Features <ul><li>Term to Maturity  </li></ul><ul><li>the remaining life of a bond  </li></ul><ul><li>the date on whic...
Categorizing Bonds by Term to Maturity <ul><li>Money Market </li></ul><ul><li>Up to one year term </li></ul><ul><li>Short-...
Callable Bonds <ul><li>Callable (Redeemable) </li></ul><ul><li>issuer may pay bond off (i.e. call it in) before maturity <...
Convertibles <ul><li>a ‘two-way’ security  </li></ul><ul><li>combines the advantages of a bond with the option of exchangi...
Sinking Fund and Purchase Fund Debt <ul><li>Sinking Funds </li></ul><ul><li>Sums of money which are set aside out of earni...
Extendible and Retractable Bonds <ul><li>Extendible debt </li></ul><ul><li>Bonds that are issued with a short maturity ter...
Types of Bonds – Government <ul><li>Marketable Canada and Provincial Bonds </li></ul><ul><li>marketable & transferable </l...
Treasury Bills <ul><li>Features: </li></ul><ul><li>Offered in $1,000 increments </li></ul><ul><li>Original terms of 3-mont...
CSBs: Basic Characteristics  <ul><li>Issued by the Federal Government and must be sold back to the government – i.e. no se...
Types of Corporate Bonds <ul><li>Mortgage Bonds </li></ul><ul><li>secured by pledge of land, buildings or equipment </li><...
Types of Corporate Bonds <ul><li>Corporate Notes </li></ul><ul><li>rank behind all other fixed-interest securities of the ...
Foreign Bonds and Eurobonds <ul><li>Domestic Bonds: </li></ul><ul><li>Bonds denominated in the currency and the country of...
Foreign Bonds and Eurobonds <ul><li>Example: A Canadian company issued bonds  denominated  in Japanese Yen in the Japanese...
Summary <ul><li>Issuer: Issued in: Currency: Called: </li></ul><ul><li>Can. Canada Cdn$ ___________ </li></ul><ul><li>Can....
Summary <ul><li>Issuer: Issued in: Currency: Called: </li></ul><ul><li>Canada Canada Cdn$ Domestic </li></ul><ul><li>Canad...
Explain the Following Bond Quote <ul><li>XYZ Co 11½ 1 June /14 99.25 99.75 11.75 </li></ul><ul><li>XYZ is the company </li...
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Csc3 Inv Products Ch 6

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Csc3 Inv Products Ch 6

  1. 1. CSI Global Education Inc. Investment Products CHAPTER 6: Fixed-Income Securities: Features and Types
  2. 2. Chapter Highlights <ul><li>Corporations and governments borrow for a variety of reasons: </li></ul><ul><ul><li>finance future growth </li></ul></ul><ul><ul><li>finance current operations </li></ul></ul><ul><li>Significant evolution in the market for debt and fixed-income securities: many types and features to choose from </li></ul><ul><li>Common characteristic with most fixed-income securities: payment of a regular income stream </li></ul>
  3. 3. Debt or Fixed-Income Securities <ul><li>A type of security that promises to pay the lender rent (“interest”) and returns the principal (“par”) at a specified date. </li></ul><ul><li>The security may or may not be secured by a specific pledge. </li></ul><ul><li>The debt is typically outstanding for more than one year. </li></ul>
  4. 4. Rationale Behind Issuance of Debt <ul><li>Matching term of assets with term of liabilities </li></ul><ul><li>Use of financial leverage </li></ul><ul><li>Financing deficits </li></ul><ul><li>Financing growth opportunities </li></ul>
  5. 5. Bond Features <ul><li>Coupon Rate </li></ul><ul><li>the expressed rate of interest income paid by the issuer </li></ul><ul><li>typically fixed for the term of the security </li></ul><ul><li>some bonds do pay a variable coupon rate </li></ul><ul><li>Par Value </li></ul><ul><li>the nominal or face value of the bond </li></ul><ul><li>the amount the issue pays at maturity of the security </li></ul><ul><li>quoted using a base value of 100 </li></ul>
  6. 6. Bond Features <ul><li>Term to Maturity </li></ul><ul><li>the remaining life of a bond </li></ul><ul><li>the date on which the bond matures and the principal is returned to the holder </li></ul>
  7. 7. Categorizing Bonds by Term to Maturity <ul><li>Money Market </li></ul><ul><li>Up to one year term </li></ul><ul><li>Short-Term Bonds </li></ul><ul><li>Up to five years remaining to maturity </li></ul><ul><li>Medium-Term Bonds </li></ul><ul><li>From five to ten years remaining to maturity </li></ul><ul><li>Long-Term Bonds </li></ul><ul><li>Greater than ten years remaining to maturity </li></ul>
  8. 8. Callable Bonds <ul><li>Callable (Redeemable) </li></ul><ul><li>issuer may pay bond off (i.e. call it in) before maturity </li></ul><ul><li>depends on behaviour of market interest rates </li></ul><ul><li>call price typically set above the par value of the bond </li></ul><ul><li>premium seen as a compensation for being called before maturity </li></ul><ul><li>Question: </li></ul><ul><li>When would the issuer find it advantageous to call a bond? </li></ul><ul><li>What if the bond was ‘non-callable’ or ‘non-redeemable’? </li></ul>
  9. 9. Convertibles <ul><li>a ‘two-way’ security </li></ul><ul><li>combines the advantages of a bond with the option of exchanging the bond for common shares </li></ul><ul><li>with the conversion privilege the holder has an opportunity to participate in the capital appreciation of the underlying shares </li></ul><ul><li>the feature makes the issue more attractive or saleable </li></ul><ul><li>bondholders must be aware of forced conversion clauses </li></ul><ul><li>When to convert to the common shares? </li></ul>
  10. 10. Sinking Fund and Purchase Fund Debt <ul><li>Sinking Funds </li></ul><ul><li>Sums of money which are set aside out of earnings each year to provide for the repayment of all or part of a debt issue by maturity </li></ul><ul><li>Purchase Fund </li></ul><ul><li>A fund set up to retire through purchases in the market a specified amount of the outstanding bonds or debentures if purchases can be made at or below a stipulated price </li></ul>
  11. 11. Extendible and Retractable Bonds <ul><li>Extendible debt </li></ul><ul><li>Bonds that are issued with a short maturity term but with the “option” for the holder (or issuer) to exchange the debt for an identical amount of longer-term debt </li></ul><ul><li>Retractable Bonds </li></ul><ul><li>Bonds are issued with a long maturity term but with the option for the holder (or issuer) to turn in the bond for redemption at par several years sooner </li></ul><ul><li>When would the issuer elect to exercise either option? </li></ul>
  12. 12. Types of Bonds – Government <ul><li>Marketable Canada and Provincial Bonds </li></ul><ul><li>marketable & transferable </li></ul><ul><li>Canada Savings Bonds </li></ul><ul><li>Provincial Savings Bonds </li></ul><ul><li>purchased only by provincial residents </li></ul><ul><li>purchased only at a specified time of the year </li></ul><ul><li>Instalment Debentures (Serial Bonds) – municipal </li></ul><ul><li>part of the bond matures each year during the term </li></ul>
  13. 13. Treasury Bills <ul><li>Features: </li></ul><ul><li>Offered in $1,000 increments </li></ul><ul><li>Original terms of 3-month, 6-month and 1-year maturities </li></ul><ul><li>Do not pay interest </li></ul><ul><li>– sold at a discount and mature at 100 (par) </li></ul><ul><li>– difference between purchase price and par is the return on the investment </li></ul><ul><li>– this return is taxable as income and not as a capital gain </li></ul>
  14. 14. CSBs: Basic Characteristics <ul><li>Issued by the Federal Government and must be sold back to the government – i.e. no secondary market trading </li></ul><ul><li>Redeemable at par at any time </li></ul><ul><li>Non-assignable, must be registered in the name of an individual </li></ul><ul><li>Can be purchased in denominations as low as $100 </li></ul><ul><li>Limits placed on the total amount any one person can purchase </li></ul><ul><li>Market values are not affected by changes in the interest rates </li></ul><ul><li>Available only to Canadian residents </li></ul>
  15. 15. Types of Corporate Bonds <ul><li>Mortgage Bonds </li></ul><ul><li>secured by pledge of land, buildings or equipment </li></ul><ul><li>Collateral Trust Bonds </li></ul><ul><li>secured by pledge of securities </li></ul><ul><li>Equipment Trust Certificates </li></ul><ul><li>secured by equipment – for example, railway cars </li></ul><ul><li>Debentures </li></ul><ul><li>unsecured – general credit of issuer </li></ul><ul><li>Subordinated Debentures </li></ul><ul><li>junior to other securities or debt </li></ul>
  16. 16. Types of Corporate Bonds <ul><li>Corporate Notes </li></ul><ul><li>rank behind all other fixed-interest securities of the issuer </li></ul><ul><li>Foreign Bonds and Eurobonds </li></ul><ul><li>issued in currency and country other than issuer </li></ul><ul><li>Units </li></ul><ul><li>package of two or more corporate securities </li></ul><ul><li>Strip Bonds (Zero Coupon) </li></ul><ul><li>principal repayment part of high-quality bond </li></ul>
  17. 17. Foreign Bonds and Eurobonds <ul><li>Domestic Bonds: </li></ul><ul><li>Bonds denominated in the currency and the country of the issuer. </li></ul><ul><li>Foreign Bonds : </li></ul><ul><li>Bonds issued in a currency and country other than the issuer. </li></ul><ul><li>Eurobonds : </li></ul><ul><li>Bonds denominated in a currency that is different from the country of issue. The issuing country and the country that the bond is issued in are also different. </li></ul>
  18. 18. Foreign Bonds and Eurobonds <ul><li>Example: A Canadian company issued bonds denominated in Japanese Yen in the Japanese market, these would be foreign bonds . </li></ul><ul><li>Example: Bonds issued by a Canadian company or government in Japan, denominated in U.S. dollars would be Eurobonds . </li></ul>
  19. 19. Summary <ul><li>Issuer: Issued in: Currency: Called: </li></ul><ul><li>Can. Canada Cdn$ ___________ </li></ul><ul><li>Can. Germany Euros ___________ </li></ul><ul><li>US France Sterling ___________ </li></ul><ul><li>Can. Italy Cdn$ ___________ </li></ul><ul><li>UK US US$ ___________ </li></ul>
  20. 20. Summary <ul><li>Issuer: Issued in: Currency: Called: </li></ul><ul><li>Canada Canada Cdn$ Domestic </li></ul><ul><li>Canada Germany Euros Foreign </li></ul><ul><li>US France Sterling Eurobond </li></ul><ul><li>Canada Italy Cdn$ Eurobond </li></ul><ul><li>UK US US$ Foreign </li></ul>
  21. 21. Explain the Following Bond Quote <ul><li>XYZ Co 11½ 1 June /14 99.25 99.75 11.75 </li></ul><ul><li>XYZ is the company </li></ul><ul><li>11½ is the coupon </li></ul><ul><li>1 June /14 is the maturity date </li></ul><ul><li>the bond matures on June 1, 2014 </li></ul><ul><li>99.25 represents the percentage of par (the bid price) </li></ul><ul><li>99.75 represents the ask price </li></ul><ul><li>11.75 is the bond’s yield to maturity </li></ul>

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