Bonds.pdf
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Bonds are units of corporate debt that are issued by companies and traded as securities. They traditionally pay a fixed rate of interest and the price is inversely related to interest rates, so prices fall when rates rise. Bonds have a face value paid back at maturity. Key characteristics include the coupon rate, coupon dates, maturity date, and issue price. Common types are zero coupon, convertible, fixed-rate, floating-rate, perpetual, inflation-linked, callable, and puttable bonds. Bond prices are determined by interest rates and yield-to-maturity calculations.
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Bonds and their valuation
The document discusses bonds and their valuation. It begins by outlining key bond characteristics like par value, coupon payments, maturity date, and call provisions. It then explains how to value a bond by discounting its expected cash flows. Specifically, a bond's value is the present value of the coupon payments plus the par value at maturity, discounted at the appropriate interest rate. The value of a bond depends on factors like the coupon rate relative to market interest rates.
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Bonds are complex instruments, but understanding the basics can provide insight. There are several key points about bonds:
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2) Understanding how interest rates and bond prices are inversely related is crucial, as are the various ways bonds pay interest.
3) Key bond characteristics like yield, maturity, duration, and credit quality help investors evaluate bonds and their associated risks.
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The document provides an overview of bond valuation. It defines what a bond is and key bond characteristics like face value, coupon rate, maturity date. It describes different types of bonds including corporate bonds, government bonds, and municipal bonds. It then explains what bond valuation is, the factors that affect bond prices, and different approaches to calculating bond value such as using the present value of expected cash flows discounted at the yield to maturity. Worked examples are provided to demonstrate how to value both coupon-paying bonds and zero-coupon bonds.
Definition
The document defines coupon rate as the interest rate stated on a bond, expressed as a percentage of the principal. The coupon rate is used to calculate the periodic interest payments made to bondholders until maturity. There is an inverse relationship between bond prices and interest rates - as interest rates rise, bond prices fall and vice versa. Calculating the yield to maturity accounts for the time value of money and all expected future coupon payments. Key risks for bond investors include interest rate risk, reinvestment risk, and credit/default risk if the bond issuer is unable to repay the debt.
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1) A bond is a debt investment where an investor loans money to an entity for a defined period at a fixed or floating interest rate. Bonds pay periodic interest payments and repay the principal at maturity.
2) There are various types of bonds including callable/putable bonds which allow early redemption, and convertible bonds which can be exchanged for stock.
3) Bond prices are inversely related to interest rates so they carry risks like interest rate risk, reinvestment risk, credit risk, and call risk which could impact the bond value. Various factors like ratings influence the credit risk.
SECTION IV - CHAPTER 24 - Fixed Income - Bonds
Bonds are fixed income instruments that represent loans to borrowers like corporations or governments. Bondholders are creditors who receive interest payments and repayment of principal at maturity. Key bond components include maturity date, coupon rate, credit rating, and yield measures like yield-to-maturity. Bond prices are inversely related to interest rates and face risks like default, inflation, and changes in interest rates. A yield curve plots bond yields of the same credit quality against maturity and can be normal, inverted, or flat depending on economic conditions.
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The document provides an overview of bond valuation. It defines what a bond is and key bond characteristics like face value, coupon rate, maturity date. It describes different types of bonds including corporate bonds, government bonds, and municipal bonds. It then explains what bond valuation is, the factors that affect bond prices, and different approaches to calculating bond value such as using the present value of expected cash flows discounted at the yield to maturity. Worked examples are provided to demonstrate how to value both coupon-paying bonds and zero-coupon bonds.
Definition
The document defines coupon rate as the interest rate stated on a bond, expressed as a percentage of the principal. The coupon rate is used to calculate the periodic interest payments made to bondholders until maturity. There is an inverse relationship between bond prices and interest rates - as interest rates rise, bond prices fall and vice versa. Calculating the yield to maturity accounts for the time value of money and all expected future coupon payments. Key risks for bond investors include interest rate risk, reinvestment risk, and credit/default risk if the bond issuer is unable to repay the debt.
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1) A bond is a debt investment where an investor loans money to an entity for a defined period at a fixed or floating interest rate. Bonds pay periodic interest payments and repay the principal at maturity.
2) There are various types of bonds including callable/putable bonds which allow early redemption, and convertible bonds which can be exchanged for stock.
3) Bond prices are inversely related to interest rates so they carry risks like interest rate risk, reinvestment risk, credit risk, and call risk which could impact the bond value. Various factors like ratings influence the credit risk.
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The document provides an introduction to bonds, including how they are issued, their key features and types. It defines a bond as a debt security where the issuer owes the holder principal plus interest. Bonds are issued through underwriting by banks or firms. Their main features include the coupon rate, maturity date and issuer. The riskiness of a bond depends on the issuer, with government bonds being lowest risk.
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Investment Fundamentals
Bonds are one of the three main generic asset classes.
Bonds are a long-term liability with a specified amount of interest and specified maturity date. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities.
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A bond is a form of loan issued by companies or governments to raise funds from investors. It obligates the issuer to pay interest regularly and repay the principal at maturity. Bondholders have a creditor relationship with the issuer rather than an ownership stake. While bonds offer fixed regular interest payments, they also carry more risk than equity since bondholders have a lower priority than shareholders in the event of bankruptcy.
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INVESTING IN
STOCKS AND BONDS
Why Consider Bonds?
Bonds reduce risk through diversification.
Bonds produce steady income.
Bonds can be a safe investment if held to maturity.
Your Rights as a Bondholder
Bondholders are creditors
Bond indenture
Protective covenants
Payment Characteristics of Bonds
Face value: The amount the issuer pays to redeem the bond
It is usually $1,000 for corporate bonds.
Coupon interest payments:
Most bonds have a fixed rate of return, which are the interest payments that are made every 6 months.
The amount of the payment is determined by multiplying the bond’s coupon rate by the face value of $1,000.
Example: An 8% bond pays $80 in interest per year (0.08 × $1,000) divided into two payments of $40 semiannually.
Retirement Methods
Redeemed at maturity
Call provision
Sinking fund provision
Convertible bonds can be converted into common stock.
Corporate Bonds
Corporate bonds - allow firms to borrow money, are a major source of funding.
Denominations in $1000.
Secured bond – backed by collateral.
Unsecured bond – a debenture.
Hierarchy of bonds – subordinated debentures are low on the list.
Government-Issued Bonds
U.S. Treasury Securities
U.S. Agency Bonds
Conventional
Mortgage-backed
Municipal Bonds
General obligation (GO) bonds
Revenue bonds
Special Types of U.S. Treasury Bonds
U.S. Treasury Strips
Inflation-Indexed Bonds
Intended to lessen price risk of bonds
The coupon rate is not changed.
The redemption value is adjusted periodically to reflect inflation. Example: If annual inflation is 3%, the redemption value is increased to $1,030.
Munis’ Income Tax Advantage
Example:
Muni Yield = 5.91% and Tax rate = 28% (0.28)
FTEY = 5.91/(1.00 – 0.28)
= 5.91/0.72 = 8.21%
Compare to yields on taxable bonds and choose the bond with the highest yield.
Special Situation Bonds
Zero Coupon Bonds
Junk bonds
Bond Ratings – A Measure
of Riskiness
Moody’s and Standard & Poor’s provide ratings on corporate and municipal bonds.
Ratings involve a judgment about a bond’s future risk potential.
Default risk – ability to repay principal.
Inability to meet interest obligations.
The lower the rating, the higher the rate of return demanded by investors.
Safest bonds receive AAA, D is extremely risky.
Expected Return from Bonds
Current yield (CY): annual interest divided by current price
Example:
Bond price (P) = $900
Annual coupon interest (I) = $120
The current yield calculation:
CY = I/P = $120/$900 = 0.1333 or 13.3%
The advantage of this calculation is that it is easy.
The disadvantage is that ignores maturity.
Yield to Maturity (YTM)
Yield to maturity is the return you would earn by buying a bond today and holding it until it is redeemed by the issuer.
Formula (approximation)
YTM = [ I + (1,000 – P)/N]/ [(P + 1,000)/2]
Example: I = 120, P = 900, N = 5
YTM = [120+(1,000 – 900)/5]/ [(900 + 1,000)/2]
= [120 + 20]/ [950]
= 140/950 = 0.1474 or 14.74%
YTM Example..contd.
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The document provides an introduction to bonds, including how they are issued, their key features and types. It defines a bond as a debt security where the issuer owes the holder principal plus interest. Bonds are issued through underwriting by banks or firms. Their main features include the coupon rate, maturity date and issuer. The riskiness of a bond depends on the issuer, with government bonds being lowest risk.
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101434287 investment-in-bond
Bonds are debt instruments issued by organizations and governments to borrow money. Bondholders are lenders who receive interest payments until the bond matures, at which point the principal is returned. The main types of bonds are zero-coupon bonds, floating rate bonds, callable bonds, puttable bonds, convertible bonds, and amortizing bonds. People invest in bonds to earn interest income and save on taxes. The tax treatment of bond returns depends on the type of bond and whether the investor realizes capital gains or losses upon selling.
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Bonds are one of the three main generic asset classes.
Bonds are a long-term liability with a specified amount of interest and specified maturity date. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities.
bonds and debentures
A bond is a form of loan issued by companies or governments to raise funds from investors. It obligates the issuer to pay interest regularly and repay the principal at maturity. Bondholders have a creditor relationship with the issuer rather than an ownership stake. While bonds offer fixed regular interest payments, they also carry more risk than equity since bondholders have a lower priority than shareholders in the event of bankruptcy.
Bond markets
The document discusses various types of fixed income securities including bonds, their key features such as coupon rate, maturity date, and yield. It also covers bond market sectors such as the domestic bond market, foreign bond market, and international bond market. Various government bond issuers from countries around the world are also outlined.
Bond
Bonds and debentures are both long-term borrowing instruments where the borrower promises to pay interest on specific dates and the principal upon maturity. Debentures are unsecured while bonds can be secured by assets of the issuing company. Bonds provide regular income payments to investors and do not provide ownership in the issuing company. The value, yield, and returns of bonds are determined by factors such as the par value, coupon rate, maturity date, call provisions, and credit quality of the issuer.
Bond
Bonds are debt instruments issued by governments and large organizations to raise capital. When an investor purchases a bond, they are lending money to the bond issuer. In exchange, the bond issuer promises to repay the principal amount at maturity and make regular interest payments until then. Bond values can fluctuate depending on factors like the issuer's creditworthiness, prevailing market interest rates, and the bond's maturity date and yield.
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Characteristics of Bond
Types of Debt
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Callable , Putable bonds
Structured Debt Securities
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The document discusses the key characteristics of bonds. It defines what a bond is, who issues them, and various types including corporate bonds, municipal bonds, and foreign bonds. It then outlines important bond characteristics such as par value, coupon payments, interest rates, maturity dates, call and put provisions, convertible bonds, and income bonds. Bonds are a long-term debt instrument where the issuer borrows money from investors and agrees to repay the principal amount on a future date, while periodically paying interest.
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This document presents information on bonds. It begins with definitions of a bond, including that a bond is a long-term contract where a borrower agrees to pay interest and return the principal to holders on specific dates. The document then discusses characteristics of bonds such as par value, coupon interest rate, and maturity date. It also covers various types of bonds like zero coupon bonds, floating rate bonds, perpetual bonds, and others. In total, the document provides an overview of what bonds are and various bond types.
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This document discusses bond valuation methods. It begins by introducing bond valuation and providing details about the project such as title, location, duration. It then lists the objectives of understanding various bond features, valuation methods, yield measures, and interest rate risk measurement. The document proceeds to cover topics such as bond indentures, features of different bond types, accrued interest calculations, redemption provisions, and embedded options that can benefit bondholders or issuers.
Valuation of bond and shares
Bonds are the important source for borrow for investment in their business.here in this side we discuss about how to valuate bonds and share
INVESTING IN STOCKS AND BONDSWhy Consider BondsBond.docx
INVESTING IN
STOCKS AND BONDS
Why Consider Bonds?
Bonds reduce risk through diversification.
Bonds produce steady income.
Bonds can be a safe investment if held to maturity.
Your Rights as a Bondholder
Bondholders are creditors
Bond indenture
Protective covenants
Payment Characteristics of Bonds
Face value: The amount the issuer pays to redeem the bond
It is usually $1,000 for corporate bonds.
Coupon interest payments:
Most bonds have a fixed rate of return, which are the interest payments that are made every 6 months.
The amount of the payment is determined by multiplying the bond’s coupon rate by the face value of $1,000.
Example: An 8% bond pays $80 in interest per year (0.08 × $1,000) divided into two payments of $40 semiannually.
Retirement Methods
Redeemed at maturity
Call provision
Sinking fund provision
Convertible bonds can be converted into common stock.
Corporate Bonds
Corporate bonds - allow firms to borrow money, are a major source of funding.
Denominations in $1000.
Secured bond – backed by collateral.
Unsecured bond – a debenture.
Hierarchy of bonds – subordinated debentures are low on the list.
Government-Issued Bonds
U.S. Treasury Securities
U.S. Agency Bonds
Conventional
Mortgage-backed
Municipal Bonds
General obligation (GO) bonds
Revenue bonds
Special Types of U.S. Treasury Bonds
U.S. Treasury Strips
Inflation-Indexed Bonds
Intended to lessen price risk of bonds
The coupon rate is not changed.
The redemption value is adjusted periodically to reflect inflation. Example: If annual inflation is 3%, the redemption value is increased to $1,030.
Munis’ Income Tax Advantage
Example:
Muni Yield = 5.91% and Tax rate = 28% (0.28)
FTEY = 5.91/(1.00 – 0.28)
= 5.91/0.72 = 8.21%
Compare to yields on taxable bonds and choose the bond with the highest yield.
Special Situation Bonds
Zero Coupon Bonds
Junk bonds
Bond Ratings – A Measure
of Riskiness
Moody’s and Standard & Poor’s provide ratings on corporate and municipal bonds.
Ratings involve a judgment about a bond’s future risk potential.
Default risk – ability to repay principal.
Inability to meet interest obligations.
The lower the rating, the higher the rate of return demanded by investors.
Safest bonds receive AAA, D is extremely risky.
Expected Return from Bonds
Current yield (CY): annual interest divided by current price
Example:
Bond price (P) = $900
Annual coupon interest (I) = $120
The current yield calculation:
CY = I/P = $120/$900 = 0.1333 or 13.3%
The advantage of this calculation is that it is easy.
The disadvantage is that ignores maturity.
Yield to Maturity (YTM)
Yield to maturity is the return you would earn by buying a bond today and holding it until it is redeemed by the issuer.
Formula (approximation)
YTM = [ I + (1,000 – P)/N]/ [(P + 1,000)/2]
Example: I = 120, P = 900, N = 5
YTM = [120+(1,000 – 900)/5]/ [(900 + 1,000)/2]
= [120 + 20]/ [950]
= 140/950 = 0.1474 or 14.74%
YTM Example..contd.
.
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- 2. What are bonds Bonds are units of corporate debt issued by companies and securitized as tradeable assets. A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common. Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa. Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.
- 3. Characteristics of Bonds Face value (par value) is the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses when calculating interest payments. For example, say an investor purchases a bond at a premium of $1,090, and another investor buys the same bond later when it is trading at a discount for $980. When the bond matures, both investors will receive the $1,000 face value of the bond. The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. For example, a 5% coupon rate means that bondholders will receive 5% x $1,000 face value = $50 every year.
- 4. Characteristics of Bonds Coupon dates are the dates on which the bond issuer will make interest payments. Payments can be made in any interval, but the standard is semiannual payments. The maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond. The issue price is the price at which the bond issuer originally sells the bonds. In many cases, bonds are issued at par.
- 5. Types of bonds Zero coupon bonds Convertible Bonds Fixed-rate bonds Floating-rate bonds Perpetual bonds Inflation-linked bonds Callable Bonds Puttable Bonds
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- 7. Click Click
- 8. Thank-You