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.
5. BONDS
The bond is a long-term liability with a specified amount of interest and specified
maturity date.
Companies, municipalities, states and sovereign governments use bonds to raise
money and finance a variety of projects and activities.
Bonds
Bonds are often secured, or
backed by a specific pledged asset
or other form of collateral.
Debentures
These bonds are unsecured. The
debt is backed solely by the good
faith and credit of the borrower.
6. BONDS (CONT.)
Bond Class
Bonds are commonly referred as
fixed-income securities and one of
the three main generic asset
classes, along with stocks and cash
equivalents.
Bond Working
The indebted entity issues a bond
that contractually states interest
rate that will be paid and time at
which loaned funds (bond principal)
must be returned (maturity date).
The interest rate, called the coupon
rate.
Bond Issuance
Issuance price of bond is typically
set at par.
Actual market price of the bond is
depends upon
credit quality, length of time, and
coupon rate.
7. BONDS MARKET
The bond market is also called the debt market or credit market. It’s the financial market in which the
participants are provided with the issuance and trading of debt securities.
The bond market primarily includes government-issued securities and corporate debt securities,
facilitating the transfer of capital from savers to the issuers.
8. BONDS MARKET (CONT.)
Bond Market Forms
In the bond market, participants can
issue new debt in the market called
the primary market or trade debt
securities in the market called the
secondary market.
Bond Market Objective
The goal of the bond market is
to provide long-term financial
aid and funding for public and
private projects and
expenditures.
Bond Market Participants
Participants include institutional
investors, traders, governments and
individuals who purchase products
provided by large institutions.
9. BONDS TYPES
Corporate Bonds
Corporations provide corporate bonds to raise money
for Projects.
It used for longer-term debt instruments that provide a
maturity of at least one year.
Government Bonds
National governments issue government bonds and
entice buyers by providing the face value on the
agreed maturity date with periodic interest payments.
Municipal Bonds
Local governments and their agencies, states, cities,
and other government-owned entities issue municipal
bonds to fund their projects.
Mortgage Bonds
Pooled mortgages on real estate properties provide
mortgage bonds. Mortgage bonds are locked in by the
pledge of particular assets.
They pay monthly, quarterly or semi-annual interest.
10. BONDS FEATURES
Indenture
It’s document which specifies terms of the bond issue. The bond indenture is the contract between a
bondholder and the issuer.
The contract is managed by the corporate trustee who polices the actions of the issuer to ensure the
rights of the bondholder are upheld.
Affirmative Covenants
What the issuer promises to do
for the investor.
The contract is managed by the
corporate trustee.
Negative convents
It put restraints on a borrower.
Which include issuing additional
securities or taking on additional
debt that may harm the current
bondholders.
Covenants
11. BONDS FEATURES (CONT.)
Maturity
Maturity is the time at which the bond matures and the holder receives the final payment of
principal and interest.
Short-Term Maturity - One to five years in length
Intermediate-Term Maturity - Five to twelve years in length
Long-Term Maturity - Twelve years or more in length
(It affects the yield on the bond; longer maturities tend to yield higher rates)
Par value
Its the dollar amount the holder will receive at the bond's maturity. It can be any amount but is
typically $1,000 per bond. Par value is also known as principle, face, maturity or redemption
value.
(Bond prices are quoted as a percentage of pars)
12. BONDS FEATURES (CONT.)
Coupon rate
A rate states the interest rate the bond will pay the holders each year. To find the coupon's dollar
value, simply multiply the coupon rate by the par value.
The rate is for one year and payments are usually made on a semi-annual basis.
(The coupon rate also affects a bond's price)
Currency Denomination
Currency denomination indicates what currency the interest and principle will be paid in.
There are two main types:
Dollar Denominated - refers to bonds with payment in USD.
Non Dollar-Denominated - denotes bonds in which the payments are in another currency besides
United States Dollar.
13. ROLE OF TRUSTEE IN BOND ISSUANCE
A bond trustee is a financial institution with trust powers, such as a commercial bank or trust
company that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture.
Trustees serve both the debtor and the bondholders in the secondary market.
In case of default, the trustee may take the debtor to court to enforce the terms of the contract.
14. FORMS OF DEBTS
Registered Bonds
The bonds whose ownership is register with commercial bank which distributes the interest payments
and principal repayments.
Bearer Bonds
A bond with coupons attached or a bond whose possession denotes ownership.
Coupon Bonds
A bond with coupons attached that are removed and presented for payment of interest when due.
15. RISKS ON BONDS
Bonds can be a great tool to generate income and are widely considered to be a safe investment,
especially when compared to stocks. However, investors need to be aware of some potential
pitfalls and risks to holding corporate and/or government bonds.
The risks that could affect your hard-earned profits.
Interest Rate Risk
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. This is a risk if you
need to sell a bond before its maturity date and interest rates are up. You may end up selling the
bond for less than you paid for it.
16. RISKS ON BONDS (CONT.)
Inflation Risk
This is the risk that the return you earn on your investment doesn’t keep pace with inflation. If you hold
a bond paying 2% interest and inflation reaches 3%, your return is actually negative (-1%), when
adjusted for inflation.
Inflation risk increases the longer you hold a bond.
Market Risk
This is the risk that the entire bond market declines. If this happens, the price of your bond investments
will likely fall regardless of the quality or type of bonds you hold.
If you need to sell a bond before its maturity date, you may end up selling it for less than you paid for it.
17. RISKS ON BONDS (CONT.)
Credit Risk
The company or government that isn’t financially stable, there’s more of a risk you’ll lose money. Its
called credit risk or default risk.
Sometimes, the issuer can’t make the interest payments to investors, there is also possibility that issuer
won’t pay back the face value of the bond at maturity.
(Moody's, Standard & Poor's and Fitch Ratings…, AAA, B, CC)
Liquidity Risks
The risk that an investor might not be able to sell his or her corporate bonds quickly due to a thin market
with few buyers and sellers for the bond.
Low buying interest in a particular bond issue can lead to substantial price volatility and possibly have an
adverse impact on a bondholder's total return (upon sale).
18. RISKS ON BONDS (CONT.)
Tax Change Risk
Unanticipated changes in taxation may adversely impact the value of a bond to investors and
consequently its immediate market value.
19. VARIETY OF CORPORATE BONDS
Bonds are promissory notes, issued by a corporation or government to its lenders. They are usually
issued in multiples of $1,000 or $5,000.
The bond indenture specifies the amount of interest to be paid at intervals, over a specific length of
time and the principal. to be repaid on the maturity date.
Secured Debt
Bonds are often secured, or backed by a specific pledged asset or other form of collateral.
Unsecured Debt
The debt is backed solely by the good faith and credit of the borrower.
20. CORPORATE BONDS TYPES
Guaranteed Bonds
One company issues the bond and, as an added measure of security, another company guarantees to
pay it if the issuing company cannot.
Income Bonds
Only the principal is promised; interest is paid only when the enterprise's earnings can cover the cost.
Zero-coupon Bonds
No interest, but the bond is issued at a deep discount and bought back at full par value.
21. CORPORATE BONDS TYPES (CONT.)
Speculative Bonds
Also known as "junk bonds", these instruments have higher yields and are issued at lower prices than
"investment-grade bonds" because of their higher risk.
Eurobonds
Issued and traded outside the country in whose currency they are denominated, and outside any one
country's regulatory authority.
Yankee Bonds
Dollar-denominated bonds issued in the United States by foreign companies.
22. CORPORATE BONDS TYPES (CONT.)
Repurchase Agreements (Repos)
Short-term - typically overnight - contracts in which the seller agrees to buy securities back at a specified
time and at a higher price. Although structured as two offsetting sales, a repo is in reality a
collateralized loan.
Corporate Commercial Paper
Unsecured notes issued by corporations with a typical maturity of 30 days; companies use commercial
paper to raise cash for current transactions, and many find it costs less than bank loans.
Bankers' Acceptances (BA’s)
Primary and unconditional liabilities of the bank used primarily as short-term good-faith financing to fund
goods as they are being shipped from one country to another.
23. HIGH YIELD SECURITIES
Higher risk of default, these bonds pay a higher yield than investment grade bonds.
High yield bonds defined as corporate bonds rated below BBB− or Baa3 by established credit
rating agencies.
These portfolios generally offer higher yields than other types of portfolios, but they are also
more vulnerable to economic and credit risk.
(Moody's, Standard & Poor's and Fitch Ratings)
24. HIGH YIELD SECURITIES (CONT.)
Issuance of High Yield Bonds
High-yield bonds are issued by companies with outlooks that are questionable enough to prevent their debt
from being ranked investment grade. High yield companies might have high levels of debt, shaky business
models, or negative earnings.
Diversification
In today's more interconnected investment markets, advanced diversification models require more than just
core stocks and bonds. Within fixed income, high-yield bonds can help enhance diversification.
25. HIGH YIELD SECURITIES (CONT.)
Enhanced current income
To encourage investment, high yield bonds usually offer significantly greater yields than government
bonds and many investment grade corporate bonds.
Capital appreciation
An economic upturn or improved performance at the issuing company can have a significant impact
on the price of a high yield bond. This capital appreciation is an important component of a total
return investment approach.
26. HIGH YIELD SECURITIES (CONT.)
Conclusion
From a portfolio perspective, high yield investments fit into the space between equity and
fixed income.
enhancing return potential while improving diversification, particularly due to their low
correlation to investment grade fixed income securities.