Chapter 5 Flashcards by Guia Monique Flores

are roughly equally split between government and corporate bonds

bonds

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Are issued by national governments and by supranational agencies such as the bank of america and the world bank

Government bonds

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Are issued by companies such are as large banks and other large corporate listed companies like san miguel corporation

Corporate bonds

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It can be seen in a bond certificate

issuer
maturity or redemption
face value, par or principal
coupon

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Are commonly referred to as a loan stock, debt or fixed interest securities

bonds

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The feature that distinguishes a bond from most loans is that a bond is

tradable

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The six terms that can be seen in the table

nominal
stock
coupon
redemption date
price
value

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This is the amount of stock purchase and should not be confused with the amount invested or the cost of purchase

nominal

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This is the amount on which the interest will be paid and the amount that will eventually be repaid

nominal

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It is also known as the par or face value of the bond

nominal

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It represents us government bonds issued with relatively long periods to maturity

treasury bond

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This is the amount of interest paid per year expressed as percentage of the face value of the bond

coupon

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This is the date at which the issue expires and the lender will repay the borrower the sum borrowed

Redemption date

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Redemption date is also known as the

Maturity date

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Bonds generally have default risk and price risk

bonds

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The inverse relationship between interest rates and bond prices

If interest rates increase bond prices will decrease and if interest rates decreased bond prices will increase

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Other main types of risk associated with holding bonds

early redemption
seniority risk
inflation risk
liquidity risk
exchange rate risk

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The risk that the issuer may invoke a call provision and redeem the bond early

Early redemption

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This relate to the seniority with which corporate debt is rank in the event of the issuer’s liquidation

seniority risk

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The risk of inflation rising unexpectedly and eroding the real value of the bonds coupon and redemption payment

inflation risk

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Is the ease with which a security can be converted into cash

liquidity

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Bonds denominated in a currency different from that of the investors home currency are potentially subject to adverse exchange rate movements

Exchange rate risk

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The three most prominent credit rating agencies are

standard and poor
moody’s
fitch ratings

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Bond issues subject to credit ratings can be divided into two distinct categories

Those accorded an investment grade rating and those categorized as non-investment grade or speculative

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Is also known as high yield or for the worst rated junk bonds

Non-investment grade

It offer the greatest liquidity and certainty of repayment,

Investment-grade

Government bond markets

US UK Germany France Japan Primary Market Issuance

These government bond market is the largest and most liquid in the world

Government bonds issued by the us government are generally known as

Treasuries

Treasuries have four main marketable types

treasury bills treasury notes treasury bonds. treasury inflation protected securities

A money market instrument used to finance the government's short-term borrowing needs

Treasury bills

They are zero-coupon instruments that pay no interest and instead are issued at a discount to their maturity value

Treasury bills

They have maturities of less than a year and are typically issued with maturities of 28 days 91 days and 182 days

Treasury bills

Conventional government bonds that have a fix coupon and redemption date

Treasury notes

They have maturity dates ranging from more than one year to not more than 10 years from the issue date

Treasury notes

Again conventional government bonds but with maturities of more than 10 years from their issue date most commonly issued with maturities of 30 years

Treasury bonds

These are index link bands and are referred to as the TIPS

Treasury inflation protected securities

STRIPS

Separate trading of registered interest and principal securities

These are also traded based on this trip elements of treasury notes bonds and tips

Strips

These are traded for settlement the next day

US treasuries

Some of the biggest issuers of bonds are

Fannie Mae Freddie Mac

These are issued by states cities countries and other government entities to raise money to build schools highways hospitals and sewer systems as well as many other projects

municipal bonds

Interest is usually paid semi-annually and many are exempt from both federal and state taxes

Municipal bonds

Uk government bonds are known as

gilts

These are instruments that carry a fixed coupon and a single repayment date such as 5% treasury gilt 2025

Conventional government bonds

This type of bond represents the majority of government bonds in issue

Conventional government bonds

Are bonds were the coupon and the redemption amount are increased by the amount of inflation over the life of the bond they are similar to the us tips

index - linked bonds

Uk government stocks are classified into the following

0-3 years remaining ultrashort dated 3- 7 years remaining short dated 7-15 years remaining medium dated 15 years and over remaining long dated

The main types of german government bonds are

bunds schatz bobls

are longer term instruments

bunds

are issued with 2 year maturities

schatz

are issued with 5 year maturities

bobls

Are issued with maturities of between 8 and 30 years but the most common maturity is 10 years

bunds

This market is large and liquid and the yield on bunds set the set the benchmark for other european government bonds

bunds market

It settle two business days after trade date

domestic trades

is made up of longer term instruments knows as OATS and shortdated stocks known as BTANs, which have maturities up to five years

French government debt

Trading in OATS in both the domestic and international market is for

T +2 two business days later

Trading in BTANs is

T+1 in domestic market T +2 in international settlement

This bond market is one of the largest in the world and its bonds are usually referred to as JGBs

Japanese government bonds

Japanese government bonds are classified into six categories

Short-term bonds medium term bonds long-term bonds super long-term bonds individual investor bonds inflation indexed bonds

Japanese government bonds have maturities as follows

Fixed rate coupon bearing bonds - 2,5 10,20,30 40 years Inflation-indexed bonds - 10 years Floating rate bonds - 15 years JGBs for retail.investors - 3, 5, 10 years

It operate in a similar way to TIPS that is the principal amount is inflation adjusted based on movements in the cpi and the coupon is fixed but payable in the inflation-adjusted principal amount

Inflation indexed bonds

Government bonds are usually issued through agencies that are part of the country's treasury department

Primary market issuance

Are typically made in the form of an action or large investors submit competitive bids

issues

The issuer's for the government bonds described above are as follows

US: Bureau of the Fiscal Service UK:Debt Management Office Germany : Finanzagentur GmbH France : Agence France Tresor Japan: Ministry of Finance

Is bond that is issued by a company as the name suggests

Corporate bonds

The term is usually applied to longer-term debt instruments with a maturity date of more than 12 is used for instruments with a shorter maturity

Corporate bonds

is used for instrument with a shorter maturity

commercial paper

features of corporate bonds

bond security redemption provisions

Usually means some form of charge over the issuers assets so that if the issuer defaults the bondholders have a claim on those assets before other creditors

security

The security offered may be

fixed or floating

It implies that specific assets of the company or charge as security for the loan

fixed security

It means that the general assets of the company are offered as security for the loan this might include cash at the bank trade debtors or stock

floatingcharge

It gives the issuer the option to buy back all or part of the issue before maturity

call provision

These give the band holder the right to require the issuer to redeem early on a set date or between specific dates

put provisions

types of corporate debt

medium-term notes fixed rate bonds floating rate notes convertible bonds zero coupon bonds

are standard corporate bonds with maturities ranging usually from 9 months to 5 years though the term is also applied to instruments with maturities as long as 30 years

medium term notes

They have fixed coupons which are paid either half-yearly or annually and predetermined redemption dates

fixed rate bonds

Are bonds that have variable rates of interest

floating rate notes

This is the rate of interest at which banks will land to one another in london and is often used as a basis for financial instrument cash flows

London interbank offered rate (LIBOR)

are issued by companies and they give investor holding the bond two possible choices

convertible bonds

Is a bonds that pay no interest

Zero-coupon bonds

Is an alternative term for the interest payment on a bond

coupon

These are bundled securities so cold because they are marketable securities that result from the bond length or packaging together of a set of non marketable assets

asset backed securities

Are created by bonding together a set of mortgages and then issuing bonds that are backed by these assets

mortgage backed bonds

These bonds are sold on the investors who receive interest payments until they are redeem

mortgage backed bonds

Creating a bond in this way is known as... and it began in the us in 1970 when the government first issued mortgage certificates is security representing ownership of a pool of mortgages

securitization

international bonds

domestic and foreign bonds eurobonds

Is issued by a domestic issuer into the domestic market

domestic bond

Is issued by an overseas entity into a domestic market and is denominated in the domestic currency

foreign bond

Are large international bond issues often made by governments and multinational companies

eurobonds

Is one denominated in sterling and issued outside the uk though not necessarily in a european financial center

euro sterling bond issue

Are a measure of the returns to be earned on bonds

yields

The interest paid on a bond as a percentage of its market price is referred to as the

flat or running yield

Is calculated by taking the annual coupon and dividing by the bonds price and and multiplying by 100 to obtain a percentage

flat yield

Is a measure that incorporates both the income and capital return assuming the investor holds the bond until its maturity into one figure

redemption yield