Bonds

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the contract between a bond holder and the issuer

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bond indenture

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…covenants are what the issuer promises to do for the investor

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Affirmative

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… covenants are the restraints put on a borrower

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Negative

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the time at which the bond matures and the holder receives the final payment of principal and interest.

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Maturity

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is the amount of time until the bond actually matures.

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"term to maturity"

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Short-Term Maturity is this length

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1 – 5 years

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Intermediate-Term Maturity is this length

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5 – 12 years

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Long-Term Maturity is this length

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12 years or more

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longer maturities tend to yield higher

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rates

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A longer maturity typically indicates … volatility

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higher

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is the dollar amount the holder will receive at the bond's maturity.

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Par value

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Bond prices are quoted as a percentage of …

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par

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states the interest rate the bond will pay the holders each year.

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coupon rate

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To find the coupon's dollar value, simply multiply the coupon rate by the ...

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par value

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Par value is 1,000 per bond or…

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100

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Coupon Payment is $70 per year (coupon=coupon rate* par value = .07 *$1,000 = $70

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Coupon Payment is $70 per year (coupon=coupon rate* par value = .07 *$1,000 = $70

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These instruments pay no interest to the holder and are issued at a deep discount.

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Zero-Coupon Bonds

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As the bond nears maturity, its price increases to reach par value

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Zero-Coupon Bonds

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The interest rate of these bonds increases or "steps-ups" at a stated date(s).

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Step-up Notes

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A structure that essentially incorporates features of both a zero coupon bond and a coupon paying bond.

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Deferred Coupon Bonds

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These bonds have coupon rates that reset at predetermined times.

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Floating-Rate Bonds

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The rate for this type of bond is usually based on an index or benchmark

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Floating-Rate Bonds

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state how high the coupon rate on a floating-rate bond can go

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Caps

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state how low the coupon rate on a floating-rate bond can go

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Floor

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the amount of interest that builds up in between coupon payments that will be received by the buyer of the bond when a sale occurs between these coupon payments, even though the seller of the bonds earned it.

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Accrued interest

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It equals the negotiated price of the bond plus the accrued interest.

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Full Price

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is simply the price of the bond without the accrued interest.

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Clean Price

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This type of maturity requires the borrower to pay the investor one lump sum of the principle on the stated maturity date.

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Bullet Maturity

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Most corporate and government bonds use this structure

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Bullet Maturity

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ABS

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Asset-Backed Security

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MBS

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Mortgage-Backed Security

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have structures that pay the principal back at certain intervals during the bond's life.

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Amortizing Securities

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Two types of amortizing securities

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ABS & MBS

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They are called amortizing securities because the principle amount … as the security matures

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shrinks

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The provisions for redeeming bonds are found in the…

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indenture

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provisions for redeeming bonds can be:

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1.Called
2.Refunded
3.Have Prepayment Options and/or
4.Sinking Fund Provisions

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By adding a call feature in the indenture, a bond becomes a …

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callable bond.

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gives the issuer the right to redeem the bonds on a stated date or a schedule of dates before the stated maturity date for the bonds arrives.

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a callable bond

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For callable bond:
This is the price that the issuer will pay the bondholder; also know as the redemption price.

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Call Price

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For callable bond:
This is the date or dates that the issuer can call the bond from the holders.

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Call Date

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For callable bond:
When a callable bond is originally issued, it is said to have a deferred call of so many years up to the first call date, which is the first day the bond can be called by the issuer.

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Deferred Call

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Callable Bonds
These prices tend to be above par until the first par call date. The price is typically known before the redemption occurs.

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Regular or General Redemption Prices

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Callable Bonds
These prices occur because of certain events such as sinking funds, repossessions, forced sales, and eminent domain. These usually occur at par value but could be less, depending on the collateral backing the bonds.

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Special Prices

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When callable bonds are called, it can be for the entire issue or for just a part of it.

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When callable bonds are called, it can be for the entire issue or for just a part of it.

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Calling Bonds
A partial call can be done on a random basis, like picking numbers out of a hat, or on a …

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pro rata basis.

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is the replacement of a current high coupon rate bond

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The refunding of an issue

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This is done by issuing newer bonds at a lower coupon rate.

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refunding of an issue

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With regards to a callable issue, … offers little protection to a holder.

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refunding

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… could occur as soon as it becomes advantageous to the issuer to replace older, higher rate bonds.

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refunding

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This form of redemption occurs in ABS and MBS securities.

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Prepayments

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In this instance the investor could receive additional principal payments before the maturity date.

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Prepayments

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If this were to happen in the payment of a bond, the bond would be redeemed before maturity.

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Prepayment

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This helps redeem and retire bonds. It requires an issuer to retire or pay for the retirement of a specific portion of the issue at certain times.

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Sinking Fund Provisions

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Options that benefit the issuer:

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Call options
Prepayments
Caps

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Options that benefit the holder:

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Puts
Floor
Conversion Privilege

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This allows the bondholders to exchange their current bond with equity in the same firm using convertible bonds.

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Conversion Privilege

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Conversion Privilege:
bondholders may also receive equity or fixed income securities in another firm by the use of … bonds.

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exchangeable

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Institutional investors tend to finance their purchases in two ways instead of purchasing securities outright:

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Buying on Margin
Repurchase Agreements

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Regulations T and … limit the degree to which the margin can be extended to the buyer

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U

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collateralized loans in which the institution sells a security with the commitment to purchase the same security at a later date.

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Repurchase Agreements

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the repo rate tends to be set around the … rate

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Federal Funds rate

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Repurchase Agreements:
The … is an implied interest rate, which is the cost that the institution incurs for funding the position.

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repo rate