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FIXED INCOME ANALYSIS
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GENERAL INVESTMENT
INFORMATION
WHAT IS A BOND ?
A BOND IS A DEBT INSTRUMENT REQUIRING THE ISSUER
TO REPAY TO THE LENDER/INVESTOR THE AMOUNT
BORROWED PLUS INTEREST OVER A SPECIFIC PERIOD OF
TIME
ISSUER
PRINCIPAL
COUPON
MATURITY DATE
$200,000,000 IBM 5% 20/01/2022
COUPON
PRINCIPAL
ISSUER
MATURITY
DATE
4 MAJOR ISSUERS
GOVERNMENT AGENCIES
CORPORATIONS
sovereign
MUNICIPALITIES
FEDERAL GOVERNEMENTS
MATURITY DATE
THE TERM TO MATURITY OF A BOND IS THE NUMBER
OF YEARS OVER WHICH THE ISSUER HAS PROMISED TO
MEET THE CONDITIONS OF THE OBLIGATION.
SHORT-TERM : 1-5 YEARS
INTERMEDIATE : 5-12 YEARS
LONG –TERM: >12 YEARS
PRINCIPAL + COUPON RATE
THE PRINCIPAL OF A BOND IS THE AMOUNT THAT THE
ISSUER AGREES TO REPAY THE BONDHOLDER AT THE
MATURITY DATE. (face value)
THE COUPON RATE IS THE RATE OF INTEREST THAT
THE ISSUER AGREES TO PAY EACH YEAR.
(Example : a bond with an 8% coupon and a principal of $1000 will
pay annual interest of $ 80 )
WHAT ARE ZERO-COUPON BONDS ?
FIXED RATE BONDS : BONDS WHOSE COUPONS ARE
FIXED THROUGHOUT THE LIFE OF THE BOND.
FLOATING RATE BONDS : BONDS WHOSE COUPONS ARE
RESET PERIODICALLY ACCORDING TO A PREDETERMINED
BENCHMARK.
CURRENT YIELD
COUPON
Current Yield = -------------Bond Price
Deficient way to evaluate a bond because it does not take into account
the principal to be paid at maturity.
YIELD TO MATURITY
RATE OF INTEREST AN INVESTOR WOULD GET IF :
•BOND IS HELD TO MATURITY
•ALL COUPONS ARE REINVESTED AT CURRENT RATE
•YTM IS THE DISCOUNT RATE AT WHICH THE PRESENT VALUE OF
FUTURE PAYMENT = PRICE OF THE SECURITY
YIELD TO MATURITY
This is the rate at which you compare each bond within :
• Its maturity
• Its rating
PRICE QUOTES
•THE PRICE OF BONDS ARE QUOTED AS PERCENTAGE OF
FACE VALUE
• A BOND WITH A FACE VALUE OF $1000 AND A PRICE
OF 91 ¾ (% of face value) HAS A MARKET VALUE
OF $ $917.50
CALL AND REFUNDING
PROVISIONS
• A CALL PROVISION GIVES THE ISSUER THE RIGHT TO
RETIRE THE DEBT, FULLY OR PARTIALLY, BEFORE
THE SCHEDULED MATURITY.
WHY WOULD A COMPANY DECIDE TO BUY BACK ITS DEBT ?
WOULD A CALLABLE BOND HAVE A HIGHER OR LOWER
YIELD THAN A NON-CALLABLE BOND ? WHY?
THE CALL FEATURES ARE STATED AT THE ISSUANCE OF
THE BOND.
THE CALL PRICE IS USUALLY HIGHER OR EQUAL THAN THE
PRINCIPAL:
CALL PREMIUM
CALL PROTECTION PERIOD : BOND CANNOT BE CALLED
BEFORE THAT DATE
CONVERTIBLE BONDS
A CONVERTIBLE BOND IS A BOND THAT CAN BE EXCHANGED FOR
SPECIFIED AMOUNT OF COMMON STOCK IN THE ISSUING FIRM.
CONVERSION RATIO vs. CONVERSION PRICE
QUESTIONS
•WHAT ARE THE RISK ASSOCIATED WITH INVESTING
IN BONDS ?
•WHAT IS A FLOATING RATE BOND ?
•WHAT IS THE MARKET VALUE OF A BOND PRICED AT 94
WITH A $1000 FACE VALUE ?