1 / 27

Investment Analysis and Portfolio Management First Canadian Edition

Investment Analysis and Portfolio Management First Canadian Edition By Reilly, Brown, Hedges, Chang. 11. Chapter 11 Bond Fundamentals. Basic Features of a Bond Global Bond Market Structure Types of Bond Issues Obtaining Information on Bond Prices. The Basic Features of a Bond.

elvina
Download Presentation

Investment Analysis and Portfolio Management First Canadian Edition

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Investment Analysis and Portfolio Management First Canadian Edition By Reilly, Brown, Hedges, Chang 11

  2. Chapter 11Bond Fundamentals • Basic Features of a Bond • Global Bond Market Structure • Types of Bond Issues • Obtaining Information on Bond Prices

  3. The Basic Features of a Bond • Bonds as fixed income securities • Pay a fixed amount of interest periodically to the holder of record • Repay a fixed amount of principal at the date of maturity

  4. The Basic Features of a Bond • Bond market is divided by maturity • Money Market: Short-term issues that mature within one year • Notes: Intermediate-term issues that mature between one and ten years • Bonds: Long-term obligations with maturity greater than ten years

  5. Bond Characteristics • Intrinsic Features • Coupon: • Determine the periodic interest income • Term to maturity: • Term bond or a serial bond • Principal value: • Different from market value and the common principal or par value is $1,000 • Type of ownership: • Bearer vs. registered bonds

  6. Bond Characteristics • Types of Issues • Secured (senior) bonds • Unsecured bonds (debentures) • Subordinated (junior) debentures

  7. Bond Characteristics • Indenture provisions • The indenture is the contract between the issuer and the bondholder specifying the issuer’s legal requirements • Features affecting a bond’s maturity • Callable (call premium) • Noncallable • Deferred call • Nonrefunding provision • Sinking fund

  8. Rates of Return on Bonds Holding Period Return where: HPRi,t = the holding period return for bond i during period t Pi,t+1 = the market price of bond i at the end of period t Pi,t = the market price of bond i at the beginning of period t Inti,t = the interest payments on bond i during period t

  9. Rates of Return on Bonds Holding Period Yield

  10. The Global Bond Market Structure • The market for fixed-income securities is substantially larger than the listed equity exchanges (NYSE, TSE, LSE) because corporations tend to issue bonds rather than common stock • In 2007, 30% of new security issues in Canada were equity (common and preferred)

  11. The Global Bond Market Structure • Bond Ratings • Most corporate and municipal bonds are rated by one or more of the rating agencies • The exceptions are very small issues and bonds from certain industries, such as bank issues. These are known as non-rated bonds • Two major rating agencies • Dominion Bond Rating Service (DBRS) • Standard and Poor’s Rating Direct Canada

  12. The Global Bond Market Structure: Bond Ratings

  13. Types of Bond Issues • Domestic Government Bonds • Canada • T-bills, notes, bonds • Real Return Bonds (RRBs) • CPI indexed bonds • Canada Savings Bonds (CSBs) • Japan • Medium term, long term, super long term • United Kingdom • Short gilts, medium gilts, long gilts • Eurozone • Government bonds

  14. Types of Bond Issues • Government Agency Issues • United States • Not direct issues, but backed by “full faith and credit” of the U.S. government • GNMA pass-through certificates • Japan • Account for about 7% of the total Japanese yen bond market

  15. Types of Bond Issues • Municipal Bonds • General obligation (GO) bonds • Revenue bonds • Interest payments are exempt from federal income tax • Convert the tax-free yield of a municipal bond selling close to par to an equivalent taxable yield (ETY) where: i = coupon rate of the municipal obligations T = marginal tax rate of the investor

  16. Types of Bond Issues • Municipal Bond Insurance • Significant feature of U.S. municipal bond market is municipal bond insurance • Bond insured against default risk • Insurance is irrevocable for the life of the issue

  17. Types of Bond Issues • Corporate Bonds • Mortgage bonds • Equipment trust certificates • Collateral Trust Bonds • Collateralized mortgage obligations (CMOs) • Asset-backed securities (ABSs) • Certificates for automobile receivables (CARs) • Credit card receivables • Variable rate notes • Zero coupon and deep discount bonds • High-yield bonds

  18. Corporate Bonds • High-Yield Bonds • Also known as speculative bonds and junk bonds • Based on specification that bonds rated below BBB make up high-yield market, that is, non-investment grade bonds • High-yield bond market exploded in size and activity beginning in the early 1980s • Major owners of high-yield bonds have been mutual funds, insurance companies, and pension funds

  19. Corporate Bonds • Japanese Corporate Bond Market • Bonds issued by industrial firms or utilities • Minimum issuing requirements are specified by the Ministry of Finance • Bonds issued by banks to finance loans to corporation • Commercial banks • Long-term credit banks • Mutual loan and savings banks • Specialized financial institutions

  20. Corporate Bonds • Pound Sterling Corporate Bond Market • Three Forms • Debentures • Unsecured loans • Convertible bonds • Maturity structure is fairly wide • Coupon structure is also broad with high-coupon bonds in the 10 to 14% range • Almost all U.K. corporate bonds are callable term bonds

  21. Corporate Bonds • Eurozone Corporate Bonds • Pure corporate bonds that include industrial and utility firms (about 15%) • Securitized/collaterlized bonds that include indirect corporate borrowing (about 12%)

  22. International Bonds • Foreign bonds are sold in one country and currency by a borrower of a different nationality • For example, Canadian dollar-denominated bonds sold in Canada by a Japanese firm (Maple bonds) • Eurobonds are securities denominated in U.S. dollars and underwritten by international bond syndicates and sold to investors outside the U.S.

  23. International Bonds • United States • Yankee bonds register with SEC • Eurodollar bond market affected by changes in value of U.S. dollar • Japan • Samurai bonds: Yen denominated issued by non-Japanese firms in Japan • Euroyen bonds: Yen denominated, sold outside Japan

  24. International Bonds • United Kingdom • Bulldog bonds are sterling-denominated bonds issued by non-English firms and sold in London • Eurosterling bonds are sold in markets outside London by international syndicates • Eurozone • Market popular among foreign issuers including issuers domiciled in the U.S. • Impressive growth in Eurobonds issued by non-residents

  25. Obtaining Information on Bonds • Less emphasis on fundamental analysis • Most bond investors rely on rating agencies for credit analysis • Market and economic conditions • Intrinsic bond features • National Association of Securities Dealers (NASD) through Trade Reporting and Compliance Engine (TRACE) • Release more timely information

  26. Interpreting Bond Quotes

  27. Interpreting Bond Quotes • 407 International Inc. • 6.05% coupon • Paid semi-annually • Maturity July 27 ’09 • Last Price traded $101.76 • Yield, based on last price, is 3.82%

More Related