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Topic 5 BONDS.pptx

  1. Debt instruments
  2. BONDS:- “A bond is a debt investment in which an investor loans money to an entity which borrows the funds for a definite period of time at a variable or fixed interest rate”.
  3. Bond terminology:- Face value:- The price of a bond when first issued. Coupon rate:- The periodic interest payments promised to bondholders are a fixed percentage of bonds face value or simply the interest rate. Maturity:- The time until the principal is scheduled to be repaid.
  4. Call provisions:- Some bonds contain a provision which enables the issuer to buy the bond back from the bondholder at a pre-specified price. Put provision:- Some bonds contain a provision due to which the buyer can sell the bond at a pre- specified price before its maturity date.
  5. Bond issuers:- There are 3 main categories of bonds:- 1) Corporate bonds are issued by companies. They are high risk than government bonds. 2) Municipal bonds are issued by states and municipalities. They can offer tax-free coupon income for residents of those municipalities. 3) U.S. Treasury bonds (more than1-10years to maturity),where as bills ( less than 1year maturity) are collectively refered to as simply “Treasuries”.
  6. Varieties of bonds:- Convertible bonds:- These bonds can be converted into a certain number of shares of the same company at some fixed ratio in a particular date. Callable bonds:- It contains a provision that gives the issuer the right to call back the bond before its maturity date. Secured bonds:- These have specific assets of the issuer pledged as collateral for the bond. It can be issued by real estate or other assets.
  7. Unsecured bonds:- These bonds are not backed by any specific asset of issuer. More easily issued by a company that is financially sound. Government bonds:- It issued by govt. in its own currency. When issued in foreign currency then it a referred as sovereign bonds. Term bonds:- It will mature at a single specified future date. Serial bonds:- Bonds that mature in installments.
  8. Extendible and retractable bonds:- These bonds have no fixed maturity date. It can be extended on demand of buyer while in retractable the date can be reduced. Zero- coupon bonds:- It makes no coupon payments but instead is issued at a considerable discount to par value. The maturity date on zero coupon bonds are usually long-term. The price of this bond is calculated by using this formula:-
  9. Floating rate bonds:- Bonds whose interest amount fluctuates in step with the market interest rates, or some other external measures. The prices remains relatively stable because neither a capital gain nor a capital loss occurs as market interest rates go up or down. Plain vanilla bonds:- It is a standard type of bonds, one with a simple expiration date and strike price and additional features. With an exotic option, such as a knock-in-option, an additional contingency is added so that option only becomes active once the underlying stock hits a set price point.
  10. Bond ladder:- It is a portfolio of fixed-income securities in which each security has a significantly different maturity date. Investors who purchase bonds usually buy them as a conservative way to produce income. However, investors looking for a higher yield, without reducing the credit quality, usually need to purchase a bond with a longer maturity. It includes certain risk like:- •Interest rate risk •Credit risk and •Liquidity risk