Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown

1. Investment Analysis and Portfolio ManagementSeventh Editionby Frank K. Reilly & Keith C. Brown

2. Bond Fundamentals

3. Fitur dasar dari sebuah Obligasi • Membayar jumlah yang tetap untuk bunga secara berkala kepada pemegang obligasi • Membayar jumlah yang tetap untuk pokok pada tanggal jatuh tempo

4. Basic Features of a Bond • Pasar obligasi dibagi dengan jatuh tempo- pasar uanag-Isu jangka pendek yang jatuh tempo dalam waktu satu tahun - Catatan - isu jangka menengah yang jatuh tempo antara satu dan sepuluh tahun-Obligasi - kewajiban jangka panjang yang jatuh temponya lebih dari sepuluh tahun • Sisa hidup (jatuh tempo) mempengaruhi perubahan harga

5. Karakteristik Obligasi • Fitur intrinsik- Kupon - hasil (pendapatan bunga)- Jatuh tempo - istilah atau serial (kota)- Nilai pokok - berbeda dari nilai pasar- Jenis kepemilikan - pembawa atau terdaftar • Jenis Isu- Dijamin obligasi (senior)- Obligasi tanpa jaminan (surat utang)- ditundukan (junior) surat utang

6. Karakteristik Obligasi • Indenture provisions • Features affecting a bond’s maturity • Callable (call premium) • Noncallable • Deferred call • Nonrefunding provision • Sinking fund

7. Rates of Return Obligasi where: HPRi,t = the holding period for bond i during the period t Pi,t+1 = the market price of bond i at the end of period t/harga pasar akhir Pi,t = the market price of bond i at the beginning of period t/harga pasar awal Inti,t = the interest payments on bond i during period t The holding period yield (HPY) is: HPY = HPR - 1

8. Struktur Pasar-Obligasi Global • Participating issuers • 1. Federal governments • 2. Agencies of the federal government • 3. State and local political subdivisions (municipalities) • 4. Corporations • 5. International issues • Foreign bonds • Eurobonds

9. Participating Investors • Individual investors • Institutional investors • Life Insurance Companies • Commercial Banks • Property and Liability Insurance Companies • Pension Funds • Mutual Funds

10. Bond Ratings • Ratings Services 1. Duff and Phelps 2. Fitch Investors Service 3. Moody’s 4. Standard & Poor’s • Non-rated bonds

11. Alternative Bond Issues Domestic government bonds • United States - T-bills, notes, bonds. TIPS • Japan - medium term, long term, super long term • Germany - bund bonds, contract with Kassenverien • liquid market provided by Bundesbank • United Kingdom - short gilts, medium gilts, long gilts

12. 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 • Government associate organizations Germany • Federal Railway and Federal Post Office

13. 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)

14. Equivalent Taxable Yield Where: i = coupon rate of the municipal obligations T = marginal tax rate of the investor

15. Municipal Bond Guarantees • Bond insured against default risk • Insurance is irrevocable for the life of the issue • Four private bond insurance carriers • Municipal Bond Investors Assurance (MBIA) • American Municipal Bond Assurance Corporation (AMBAC) • Financial Security Assurance • Financial Guaranty Insurance Company (FGIC)

16. Municipal Bond Guarantees • Insured bonds obtain AAA (Aaa) ratings • Issues with private guarantees have more active secondary market, and lower required yield

17. Corporate Bonds • Mortgage bonds • Collateral trust bonds • Equipment trust certificates • Collateralized mortgage obligations (CMOs) • Other asset-backed securities (ABS) • Variable rate notes

18. Corporate Bonds • Zero-coupon and deep-discount bonds • Minicoupon bonds • Original-issue discount (OID) bonds • Taxes due on the implied interest • High-yield bonds (speculative bonds and junk bonds) • Noninvestment grade with rating below BBB or Baa

19. 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. German Corporate Bond Market • Bank bonds • German mortgage bonds • German commercial bonds • Private Loan Agreements (Schuldscheindarlehen)

21. U.K. Corporate Bond Markets • Debentures • Unsecured loans • Convertible bonds

22. International Bonds • Foreign bonds are sold in one country and currency by a borrower of a different nationality • Yankee bonds are U.S. dollar denominated bonds sold in the U.S. but issued by a foreign firm • Eurobonds are underwritten by international bond syndicates and sold in several national markets

23. International Bonds • United States • Yankee bonds register with SEC • Eurodollar bond market affected by changes in value of U.S. dollar

24. International Bonds • Japan • Samuri bonds - yen denominated issued by non-Japanese firms in Japan • Euroyen bonds - yen denominated, sold outside Japan

25. International Bonds • Germany • DM-denominated bonds issued by foreign companies are Eurobonds

26. 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

27. 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 • Popular publications available: • Wall Street Journal, Barron’s, Business Week, Fortune, Forbes, Federal Reserve Bulletin, Survey of Current Business

28. Bond Publications • Treasury Bulletin • Standard & Poor’s Bond Guide • Moody’s Bond Record • Moody’s Bond Survey • Fitch Rating Register • Fitch Corporate Credit Analysis • Fitch Municipal Credit Analysis • Investment Dealers Digest • Credit Markets • Duff & Phelps Credit Decisions • The Bond Player

29. Sources of Bond Quotes • Bank and Quotation Record • The Blue List of Current Municipal Offerings • Wall Street Journal • Barron’s

30. Interpreting Bond Quotes • Quoted on basis of yield or price • Price quotes are percentage of par • 98 1/2 is not $98.50 but 98.5% of par • A municipal $5,000 bond quoted at 98 1/2 would be $4,925

31. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4

32. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4 Issued by AT&T

33. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/822 7.7 52 1053/8 + 1/4 Issued by AT&T 8.125% coupon rate

34. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4 Issued by AT&T 8.125% coupon rate matures in 2022

35. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4 Issued by AT&T 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7%

36. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4 Issued by AT&T 52 of these bonds traded that day 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7%

37. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8+ 1/4 Issued by AT&T 52 of these bonds traded that day 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7% The closing price was 105 3/8% of par

38. Corporate Bond Quotes Cur Net Bonds Yld Vol Close Chg ATT 81/8 22 7.7 52 1053/8 + 1/4 Issued by AT&T 52 of these bonds traded that day 8.125% coupon rate matures in 2022 Current yield = coupon/market price = 7.7% The closing price was 105 3/8% of par which was up 1/4 from the prior day

39. Corporate Bond Quotes • Notations • “cv” = convertible • “zr” = zero coupon • “dc” = deep discount (at time of issue) • Accrued interest must be added to price quoted

40. Treasury and Agency Bond Quotes • Notations • “n” = treasury note • “p” = treasury note on which nonresident aliens are exempt from withholding taxes on interest • Quotes resemble OTC securities with bid and ask prices

41. Treasury and Agency Bond Quotes GOVT. BONDS & NOTES Maturity Ask Rate Mo/Yr Bid Asked Chg. Yld. 55/8 Dec 99n 100:08 100:10 …. 5.04

42. Treasury and Agency Bond Quotes GOVT. BONDS & NOTES Maturity Ask Rate Mo/Yr Bid Asked Chg. Yld. 55/8 Dec 99n 100:08 100:10 …. 5.04 Prices are in 32nds usually with a very small spread between bid and ask

43. Treasury and Agency Bond Quotes • U.S. Treasury Strips • “ci” is the coupon interest portion stripped from the note • “np” is the principal payment for the treasury note • Treasury Bills • Pure discount instrument - there is no coupon, they pay par at maturity • The bid-ask is not the price but the yield

44. Municipal Bond Quotes Quote from The Blue List of Current Municipal Offerings $200,000 of Indiana State Office Building bonds Guaranteed by MBIA These are zero coupon bonds due July 1, 2005 The yield to maturity is given as 5.6% To determine the price you compute the discount value The dealer offering the bonds is Bear Sterns, listed in the back of the publication with their phone number 200 INDIANA ST OFFICE BLDG COMMN MBIA 0.000 07/01/05 5.60 BEARSTER

45. Municipal Bond Quotes • Notations ETM = escrow till maturity M/S/F = mandatory sinking fund (C97) = this bond became callable in 1997 When the market yield equals the coupon rate, the price is 100 and they are referred to as dollar bonds “+” in the left column indicates a new item “#” before yield to maturity or price indicates a change

46. www.bonds-online.com www.prusec.com/daily.htm www.fitchinv.com www.moodys.com www.standardandpoors.com/ratings www.bradynet.com www.bondmarkets.com The InternetInvestments Online

47. End of Chapter 15 • Bond Fundamentals

48. Future topicsChapter 19 • The Analysis and Valuation of Bonds