basic features of a bond
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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
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
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.
Rates of Return on Bonds
ti,
ti,ti,1ti,ti, P
PIntPHPR
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
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
Equivalent Taxable Yield
Where:
i = coupon rate of the municipal obligations
T = marginal tax rate of the investor
)-(1ETY
T
i
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
Sources of Bond Quotes
• Bank and Quotation Record
• The Blue List of Current Municipal Offerings
• Wall Street Journal
• Barron’s
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
Corporate Bond Quotes
Cur Net Bonds Yld Vol Close Chg
ATT 81/8 22 7.7 52 1053/8 + 1/4
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
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
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
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%
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%
52 of these bonds traded that day
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%
52 of these bonds traded that day
The closing price was 105 3/8% of par
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%
52 of these bonds traded that day
The closing price was 105 3/8% of par which was up 1/4 from the prior day
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)
Treasury and Agency Bond Quotes
GOVT. BONDS & NOTES Maturity AskRate Mo/Yr Bid Asked Chg. Yld. 55/8 Dec 99n 100:08 100:10 …. 5.04
Treasury and Agency Bond Quotes
GOVT. BONDS & NOTES Maturity AskRate 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
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%