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  • 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
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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

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Page 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

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

Page 2: 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 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

Page 3: 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 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.

Page 4: 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

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

Page 5: 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

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

Page 6: 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

Equivalent Taxable Yield

Where:

i = coupon rate of the municipal obligations

T = marginal tax rate of the investor

)-(1ETY

T

i

Page 7: 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

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

Page 8: 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

Sources of Bond Quotes

• Bank and Quotation Record

• The Blue List of Current Municipal Offerings

• Wall Street Journal

• Barron’s

Page 9: 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

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

Page 10: 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

Corporate Bond Quotes

Cur Net Bonds Yld Vol Close Chg

ATT 81/8 22 7.7 52 1053/8 + 1/4

Page 11: 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

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

Page 12: 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

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

Page 13: 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

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

Page 14: 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

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%

Page 15: 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

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

Page 16: 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

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

Page 17: 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

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

Page 18: 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

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)

Page 19: 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

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

Page 20: 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

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

Page 21: 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

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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