Characteristics

Principal - (face value, par value, redemption value, nominal value, maturity value) The amount that will be paid when the bond matures. Almost all bonds have a par value of $1,000. In the UK the par value is £100.
Coupon Rate - (nominal rate, nominal yield, principal yield, coupon yield) The rate of interest paid every year (as a percentage of the Principal). Most pay semi-annually (i.e. every 6 months).
Coupon Frequency - The frequency of the coupon payments. In the UK, US and Japan this is usually semi-annually. In European markets and the Eurobond market this is usually annually.
Maturity Date - (redemption date, term, tenor) The date when the principal will be paid back. The term-to-maturity is the number of years before the maturity date.
[ Provisions ] - These are also called "embedded options" that can allow the investor or the issuer to shorten the bonds life. Examples are a Call provision.


Indenture / Terms and Conditions

All the relevant terms of the loan agreement between the borrower and the lender are contained in a contract called the bond indenture.
When a bond is issued it has a specific indenture associated with it.
This indenture (contract or deed) contains all the specific characteristics of this bond:

  • security

  • fixed and/or floating charges

  • order of repayment (fixed charge holders, preferential creditors, floating charge holders, unsecured creditors, subordinated/mezzanine debt, shareholders)


Covenants

The Indenture contains any (bold)covenants (positive or negative)
They are designed to protect the interests of both parties
Negative (or restrictive) covenants prevent the issuer from undertaking certain activities
- restrictions on the issuers ability to take on additional debt
Positive (or affirmative) covenants require the issuer to meet specific requirements
- requirements that the issuer provide financial statements to bond holders




Provisions

Provisions for paying of bonds
1) bullet (no way to get out)
2) amortizing (pay down over time)
3) call (specified in the provision)



Coupon Rate

The coupon rate does not normally change during the life of a bond.
The coupon rate becomes more or less attractive relative to other interest rates and it is this factor which affects the price



Total Return

The total return on a bond if held to maturity is the present value of all the cash flows
This is defined as the interest rate that will make the initial investment of a bond increase to the total future value.
There are 3 potential sources of return:
1) Capital Gain or Loss (could sell the bond)
2) Coupons
3) Reinvesting the coupons (interest on interest and re-investing the coupn at the same rate)



Portfolio Period Return

Arithmetic Average rate of return
Time Weighted rate of return
Dollar Weighted rate of return





Can be classified into 2 types
Secured
These are secured on the assets of a borrower
In the event of default a lender has the right to seize the assets and liquidate them in order to repay any outstanding debts.


1) fixed - there is claim on specific asset(s)
2) floating - ??




Unsecured
The majority of corporate bonds issued by international companies are unsecured



Pari Passu

The issue should rank equally with other issues of the same seniority



Negative Pledge

The borrower agrees not to pledge any assets if such pledging would result in less security for any bondholders
also called a covenant or equal coverage)



Cross Default

also called cross acceleration
This provision states that any default on another product (inc bond, loan or swap) will be considered a default on the issue in question.
The purpose of this is to protect a creditor or counterparty from actions favouring another creditor.



Credit Enhancement

In some cases covenants may exist whereby changes to an organisation would not constitute a complete default but would lead to a step up in the coupon paid to investors.


Another type of enhancement takes the form of a guarantee
In the event of a default the guarantee agrees to step in and make good any outstanding payments



Monoline Insurers

In the bond markets this is a type of enhancement that in return for a fee, monoline insurers guarantee bond issuers
These issuers usually have high credit ratings



Important

The term "coupon" is from the early days when paper bonds where issued with coupons attached.
The longer the maturity date, the more sensitive the price
The smaller the coupon, the more sensitive the price
The longer the maturity date, the larger the interest on interest
The larger the coupon, the larger the interest on interest


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