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Basic Features of a Bond

Basic Features of a Bond. Pay a fixed amount of interest periodically to the holder of record Repay a fixed amount of principal at the date of maturity Bond market is divided by maturity Money Market - short-term issues that mature within one year

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Basic Features of a Bond

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  1. Basic Features of a Bond • Pay a fixed amount of interest periodically to the holder of record • Repay a fixed amount of principal at the date of maturity • 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

  2. Bond Characteristics • Intrinsic features • Coupon - yield (interest income) • Maturity - term or serial (municipalities) • Principal value - different from market value • Type of ownership - bearer or registered • Types of Issues • Secured (senior) bonds (backed by asset) • Unsecured bonds (debentures) • Subordinated (junior) debentures

  3. Bond Characteristics • Indenture provisions • Features affecting a bond’s maturity • Callable (call premium): repurchase the bond at a specified call price • Convertible: bondholders have option to exchange each bond for a specified number of shares of common stock. • Put provision (putable bonds): bondholders have the option to retire the bond.

  4. Rates of Return on Bonds 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 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

  5. The Global Bond-Market Structure • Participating issuers • 1. Federal governments • 2. Agencies of the federal government • 3. State and local political subdivisions (municipalities): Convert the tax-free yield of a municipal bond selling close to par to an equivalent taxable yield (ETY) • 4. Corporations • 5. International issues • Foreign bonds • Eurobonds

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

  7. 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

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

  9. 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

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

  11. 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

  12. 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

  13. 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

  14. 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%

  15. 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%

  16. 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

  17. 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

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

  19. 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

  20. 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

  21. Practice Questions • 1. An investor in the 28% tax bracket is trying to decide which of two bonds to choose. One is a corporate bond with 8% coupon rate at par. The other is a municipal bond with a 5.5% coupon selling at par. • 2. What’s the price for: • 1. A 15-yr zero coupon bond with a YTM of 12% • 2. A 20-yr zero coupon bond with a YTM of 10%

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