Brief introduction to bonds

1. Bond Markets
Introduction

2. Bond market
Fist step is to:
Identify different bond types
Learn about the characteristics of bonds

3. Background on bonds
They are long term debt securities issued by government
agencies or corporations.
Par value = Face value (amount returned to investor at
maturity date).
Maturity usually 10-30 years.

4. Bond characteristics
Issuers required to make interest payments and repay par
value.
Call feature: allows the issuer to repurchase bond from the
investor before maturity.
Convertible bond: can be converted into a particular number
of shares of the issuers stock if the stock price reaches a
specified price.

5. Bond characteristics
Yield to maturity: annualised return on bond if held to
maturity.
If bond sell at par, yield to maturity = coupon rate
If bond sells below par, yield to maturity > coupon rate
If bond sells above par, yield to maturity < coupon rate
That is, price of bond and interest rate have an inverse
relationship

6. Introduction to bonds- dbs bank
Watch the video “Introduction to bonds”
https://www.youtube.com/watch?v=sSzs3Oy-v3g
After watching the video, write down what you have learnt
about bonds from the video.

7. Bonds- secondary market
Investors sell bonds to other investors before maturity.
Bond prices change in response to interest rates.
Brokerage firms can also take orders to buy/sell bonds.

8. Types of bonds
Treasury bonds: Long-term debt securities issued by USTreasury.
Have a look at the USTreasury site when you have time:
http://www.treasury.gov/services/Pages/bonds-securites.aspx
Payments guaranteed by federal government.
Interest subject to federal income tax but exempt from state and
local tax.
Easily sold in secondary market.

9. Types of bonds
Municipal bonds: bonds issued by state and local government
agencies
low risk
exempt from federal income tax
Federal agency bonds: bonds issued by federal agencies
low default risk
interest taxable

10. Types of bonds
Corporate bonds: bonds issued by large firms.
 Subject to default risk.
High yield (junk) bonds: issued by smaller, less stable
corporations subject to a higher level of default risk.
The risks of using bonds -The bankruptcy of Parmalat- the
Italian multinational.The Economist: “Parmalat-Skimming off
the cream”
http://www.economist.com/node/2374354

11. This was only an introduction to bonds
We will discuss the valuation of bonds later