fixed-income securities 01a intro s

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EQuity Consulting

Ronald K. CHUNG, Ph.D.EQuity Consulting Co. Ltd.

[email protected] [email protected]

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Fixed-income Securities

Introduction

mailto:[email protected]






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General Course Info.

Lectures

• Thurs, 15:30 – 18:30

Assessments

• Class participation and discussion 10%• Exercise 20%

• Mid-term test 30%

• Final 40%

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Resources

Textbook

• Martellini, Lionel, P. Priaulet and S. Priaulet, Fixed-income

Securities, latest ed.

Reference

• Fabozzi, Frank J., Bond Markets, Analysis and Strategies,

latest ed.

Also• Tuckman, Bruce, Fixed Income Securities: Tools for Today’s

Markets, latest ed.

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Ch. 1 Bonds and Money-Market Instruments

Fixed-income markets

Bonds

MM

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Fixed Income Market

S/T (MM) v. L/T

Loans vs. Negotiable (Secondary markets for Bills,

Notes, Bonds)

Issuers

Fixed Income Derivatives (e.g., Collateralized ABS )

Domestic v. Global

• Asia (Ex-JP): Financial center w/o F.I.?

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Domestic v. International

Euro bond

Bulldog bond

Dragon bond (USD in Asia)

Kangaroo bond

Maple bond

Panda bond

Samurai bond

Dim Sum bond

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Dim Sum Anyone?

• Oct 2010… bonds,

denominated in CNY andissued in HK (thus the

unofficial name), represent a

tiny portion of China's total

local-currency debt. Theamount raised so far this

year is a mere $1.46 billion,

versus the $144.7 billion worth

of yuan debt issued inside

mainland China, according

to Dealogic.

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Definition of a Bond

A financial claim by which the issuer (borrower) is

committed to paying back to the bond holder

(lender,) the amount borrowed (principal), plus

periodic interests (coupon) during a given period oftime (prior to maturity.)

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Definition

A standard bond is…

a fixed-coupon bond without any embedded

option, delivering

• its coupons (type – fixed v. float, step up? Frequency)• on periodic dates and principal

• on the maturity date.

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Key Terminologies

Issuer’s

• Name,

• Type (p. 3 – 4)

(e.g., gov’t, munis,agencies, institutions,

corp.)

• Domicile (v. currency)

• Guarantee

• Rating

Trading

• Issued v. outstanding

• Min amt / increment

• Par (v. redemption)• Price: Issuance v.

Quoted / Yield calc.

• Day count…accrual, settlement

…first coupon date

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Issuers

Government

• Treasury (US, EU, UK, JP)

• Agencies

Munis

Corporates

• Institutions

• Firms

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Moody’s S&P Fitch D&P Brief Definition

Investment Grade: High Creditworthiness

Aaa AAA AAA AAA Gilt edge, prime, maximum safety

Aa1 AA+ AA+ AA+

Aa2 AA AA AA Very high grade, high quality

Aa3 AA- AA- AA-

A1 A+ A+ A+

A2 A A A Upper medium grade

A3 A- A- A-

Baa1 BBB+ BBB+ BBB+

Baa2 BBB BBB BBB Lower medium grade

Baa3 BBB- BBB- BBB-

Distinctly Speculative: Low Creditworthiness

Ba1 BB+ BB+ BB+

Ba2 BB BB BB Low grade, speculative

Ba3 BB- BB- BB-

B1 B+ B+ B+

B2 B B B Highly speculative

B3 B- B- B-

Predominantly Speculative: Substantial Risk or in Default

CCC+

Caa CCC CCC CCC Substantial risk, in poor standing

CCC-

Ca CC CC May be in default, extremely speculative

C C C Even more speculative than those above

CI CI = Income bonds; no interest is being paid

DDD Default

DD DD

D D



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Sector Breakdown of US IG Index

Market Weight (%)

Treasury 25.81

Government sponsored 12.06

• Agency 11.06

• Supranational 1.00

Collateralized 36.96

• Mortgage 36.13

• Asset-backed 0.83

Credit 25.16

• AAA/AA 4.93

• A 11.48

• BBB 8.74

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Non Standard Bonds

Strips

• Separate Trading of Registered Interest and Principal

• Coupon strips v. Principal strips

Floating Rates

• FRN:

coupon rate indexed on S/T ref. rate (e.g., 3 mo LIBOR)

• Variable- / Adjustable- rate bonds :

coupon rate indexed on L/T ref. rate (e.g., 10 y CMT)

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Example: Inflation-Indexed Bonds

Real coupon (RC), adjusted with

• Inflation index = CPI(t+1) – CPI(t)

• Daily inflation reference, DRI

CPI(m-3) +

[(Actual AI days – 1) / Total days in mo] * [CPI(m-2) – CPI(m-1)]

Inflation adjusted Coupon

• Par x RC x [DIR(t) / DIR(0)]

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HK’s inflation linked I-Bond (2011)

A new investment tool is now available in Hong Kong: Hong Kong

Government is going to issue its first retail government bond, an inflation-linked iBond with life span of 3 years (Full name: HK$ Retail Bonds due 2014)

on July 28 and then list (Stock Code: 4208.hk) it on the Hong Kong Stock

Exchange (HKEx stock code: 388.hk) the following day on July 29.

Interest payments of the iBond will be paid semiannually (January 28 and

July 28 each year), with the floating annual interest rate based on the local

Composite Consumer Price Index (CCPI) Moving Average for the six most

recent months, and a minimum guaranteed interest rate set at +1%

annually. No interest payment, however, can be further re-invested intothe iBond. The H.K. iBond is basically tax-free, and also exempt from stamp

duty fee.

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Exercise

ID the key features on the bonds below

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Figure 1.3

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Case: Shimao (Mar. 1, 2011)

SINGAPORE — Shimao Property Holdings Ltd. reduced the size of an intended international dollar bond issue, amid a slew of

recent issuance from China's real-estate sector.

The property developer now is seeking to price a $350 million dollar bond to yield 10.875% to 11%, compared with initialguidance of 11%. It had hoped to raise up to $500 million via the planned seven-year bond, which would be callable after

four years, the people said.

The downsizing of the proposed deal and a rally in prices of Chinese property bonds helped orders increase to more than $575

million by late afternoon in Asia, one of the people said.

It plans to use proceeds to finance the redemption of maturing floating-rate notes, repay other debts, fund development

projects and for general corporate purposes.

S&P’s Ratings Services assigned a speculative BB- rating to Shimao's proposed dollar bond, matching the rating on the

developer's outstanding notes. Even so, it is a notch lower than Shimao's corporate credit rating on the view that offshore

noteholders would be materially disadvantaged compared with onshore creditors if the company were to default.

But S&P downgraded the outlook on the company's BB rating to negative on concerns that the China-based developer's credit

ratios could deteriorate.

"In our view, Shimao's key metrics and financial flexibility could weaken, given its aggressive debt issuance and expansion," said

Frank Lu, an S&P credit analyst.

The property firm's ratio of debt to earnings before interest, taxes, depreciation and amortization likely hovered around five at

the end of 2010, S&P's trigger for a ratings cut, and probably will be even higher by the end of this year, he said.

Moody's rates the proposed bond at B1, in line with the international dollar bonds the company sold in July, a term sheet for the

planned deal showed. The agency rates the corporate at Ba3, the equivalent of a notch below S&P.

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