lecture 8

Question 1

Bond characteristics

Answer 1

the most basic debt security

borrowing arrangement

Make specific payment at the specified date

Bond indenture –> contract between counterparties

Question 2

debt security

Answer 2

a claim on specific period stream of income

often called as fixed income security

Certain cash flow payment

But there is default risk of the issue –> so in pricing the credit risk does matter

Question 3

Zero coupon bond explain

Answer 3

No coupon payment

Par value = 1k

T = 30d

T=0
Po: price of the bond

Par value = 1000$ at the maturity we only receive par value

Question 4

A coupond bond example

Answer 4

par value = 1000$
Coupon rate = 8%
T = 30 years
Coupon payent = 1000$ * 0.08 = 80$

T = 0, Po = price of the bond

C1 = 80
C2 = 80 …
C30 = 80
Par value = 1000$

At the maturity we get 80 + 1000 = 1080

Question 5

International vs Domestic bond market

Answer 5

the market for domestic bonds is significantly higher than for international bonds ,

In recent years the domestic bonds have increased while the international have stayed the same

Question 6

Foreign bond

Answer 6

is offered by a foreign borrower to investors in a national capital market and denominated in that nations currency

For example: German MNC issuing dollar denominated bonds to US investors

Question 7

Eurobond issue

Answer 7

is denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency

E.g. Dutch borrower issuing dollar-denominated bonds to investors in the United kingdom, switzerland and the netherlands

Question 8

Dragon bonds

Answer 8

asian issuers (non-japanese) sell the US $ denominated bonds through asian syndicates

Typicall issued by chinese corporations, financial institutions, or government entities

Question 9

Samurai bonds

Answer 9

Yen denominated foreign bonds in japan

Question 10

Yankee bonds

Answer 10

dollar denominated bond in the US

Question 11

Bulldog bonds

Answer 11

UK pound denominated foreign bonds sold in UK

Question 12

Bearer bonds

Answer 12

possession is an evidence of ownership

Issuer does not keep record of ownership

Example: eurobonds are usually bearer bonds

Question 13

To whom are bearer bonds attractive

Answer 13

investrs desiring privacy and anonymity, one reason for this being that they enable tax evasion

Question 14

Registered bonds

Answer 14

ownership is demonstrated by associating the buyers name with the bond in the issuers records

E.g. yankee bonds

Question 15

to whomo are registered bonds attractive

Answer 15

regulators

Question 16

What offers lower yields Bearer bonds or registered bonds

Answer 16

Bearer bonds! because investors pay for the privac and anonymity. THis makes a less costl source of funds for the issuer

Question 17

On regulations

Answer 17

Foreign bonds must meet the security regulations of the country in which they are issued

Many foreign borrowers find this level of regulation burdensome and prefer to raise US dollars in the Eurobond market

E.g. Yankee bonds must meet the same regulations as US domestic bonds