Bonds
Bonds are debt instruments and the capital is paid out at the beginning and is guaranteed to be repaid upon maturity.
Bonds normally pay a fixed interest rate.
A bond is a debt instrument that represent cash flows payable over a period of time.
The cash flows they represent are the interest payments on the debt and the loan redemption.
Unlike commercial bank loans, bonds are tradable in a secondary market.
A bond is debt instrument issued by a borrower who is then required to pay interest every year including the final amount at maturity.
Bonds are commonly known as Fixed Income instruments. This goes back to the time when the only type of bonds were those that paid fixed coupons every year.
Bonds are usually considered to be debt securities with a term-to-maturity of more than year.
Debt issued with a maturity of less than 1 year is considered to be money market debt.
Bond Markets
Bonds are actively traded and can either be Exchange Traded or Over The Counter.
There is a very big secondary market so lots of volatility.
Large trades are generally done Over The Counter so there is less visibility in the market.
In London corporate bonds are traded on the London Stock Exchange on a quote driven market (SEAQ ??)using market makers.
In the US corporate bonds are traded Over The Counter.
The bond market in developed countries is large and liquid.
In emerging markets the debt market usually develops before the equity market.
Gray Market
This is an informal market where an issue is quoted during its offering period prior to formal offering
The market in a new bond prior to the formal offering.
This is to assess the level of interest from investors
Electronic Markets
Electronic Communication Networks (ECNs) have been developed
These are online bond markets that are generally used for smaller trades.
Eurex Bonds
Bondscape
TradeWeb
eSpeed
ABS
The rate of interest is called the Coupon because "bearer" bonds have no register of holders. The bond states that the issuer owes the "bearer" whoever that may be. The bond therefore has attachments called "coupons" so that the bearer may detach these as required and claim the interest.
Even when bonds are registered and the interest can be posted in the holders address the market still refers to the "coupon" or "coupon rate"
Underwriting
The common process of issuing bonds is through underwriting.
In underwriting one or more banks form a syndicate and then buy an entire issue of the bonds that they then resold to investors.
Government bonds are typically auctioned.
Quoting Conventions
Instrument | Sample Quote | Dollar Amount | Rule |
Corporate Bond | 98.2564 | $982.564 | priced to 4 dp |
US Treasury Note, US Treasury Bond | 100:02 | $1,000,625 (100+ 2/32) | left of ":" is percentage right of ":" is 32nd |
US Treasury Bill | 4.73% | $952.70 (100 - 4.73) | percent discount from par |
Mortgage Backed Security | 98-24+ | $987.656 | left of ":" is percentage A plus(+) is a 64th. A 3rd digit would be 256th |
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Bond Classifications
US Treasuries
Corporate Bonds
High Yield Bonds
Mortgage Backed Securities
Asset Backed Securities
Agency Bonds
Collateralized Debt Obligations
Risks
Credit Risk | |
Interest Rate Risk | |
Call Risk | This applies to bonds that have a call feature in their provision. This is the risk that the market interest rate drops below the coupon rate. This allows the issuer to refinance the bond |
Volatility Risk | This applies to bonds that have embedded provisions ?? |
Reinvestment Risk | This is the risk associated with the market interest rates affecting the reinvestment of the bond cash flows |
Inflation Risk | This is the risk associated with the rate of inflation affecting the value of the cash flows. |
Liquidity Risk | This is the risk associated with how easy or quickly the bond could be sold. |
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