bond : the basics by binam ghimire

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1 Bond : The Basics by Binam Ghimire

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Bond : The Basics by Binam Ghimire. Learning Objectives. Understand the meaning and terminologies in bond Understand types and feature of bond Bond Ratings. Previous Knowledge. Fixed Income Securities. Pure-discount security Coupon Security. Fixed Income Securities. - PowerPoint PPT Presentation

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Page 1: Bond  : The Basics by  Binam Ghimire

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Bond : The Basicsby Binam Ghimire

Page 2: Bond  : The Basics by  Binam Ghimire

Learning Objectives Understand the meaning and terminologies in

bond Understand types and feature of bond Bond Ratings

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Fixed Income Securities Pure-discount security Coupon Security

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Fixed Income Securities Personal Savings – in a Commercial Bank:

Demand Deposits, time-deposits, Certificates of deposits and Jumbos

Money Market Instruments: Commercial Paper, CDs, Bankers’ Acceptances, Eurodollars, Repurchase Agreements

Bond

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Bond: What is it? IOU Long term fund requirement: issue bonds Bond meaning: IOU certificate in which a

company promise to make a series of fixed interest payments and in the end repay the debt

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Bond: What is it? From Paper to Electronic recording

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Bond:Terminologies Price = ? Yield = ? Coupon = ? The price of the bond is ……….. per ………….. Therefore to buy ……………….. face value of this

bond would cost …………….. You would receive ……………….. per annum per

€100 of bond held A holder of €1000 bond would receive

……………….. on the 4th Sept. each year

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Bond:Terminologies 10Y Benchmark Bund 1.5% 4/9/22 Price =

101.154, Yield = 1.372% A 10 year German Government AAA rated debt

security, offering a 1.5% fixed coupon (paid once per year)

The price of the bond is €101.154 per €100 Therefore to buy €1000 face value of this bond

would cost €1011.54 Coupon -You would receive €100 x 1.5% per

annum per €100 of bond held A holder of €1000 bond would receive €15 on the

4th Sept. each year

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Bond:Terminologies Yield to Maturity (YTM) YTM is the interest rate that makes the present

value of a bond’s payments equal to its price. The YTM incorporates both the coupon return

plus any capital gain or loss from holding the bond to maturity (…………….%)

Redemption Value and Maturity date 100% face value repaid on ……………….. Basis Day count convention is

…………………/………………

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Page 13: Bond  : The Basics by  Binam Ghimire

Bond:Terminologies Yield to Maturity (YTM) The YTM incorporates both the coupon return

plus any capital gain or loss from holding the bond to maturity (1.372%)

Redemption Value and Maturity date 100% face value repaid on 4th September 2022 Basis Day count convention is Actual/Actual

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Bond:Conventions

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See excel file

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Bond:Types (Issuers) Treasury Bond: Government Corporate Bond: Companies Municipal Bond: State or local government Foreign Bond: Foreign government/ companies

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Bond:Types (Cash Flows) Pure Discount Bonds Level Coupon Bonds Consols

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BondsTypes (Nature)

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Redeemable Irredeemable Convertible Non-convertible Extendable/ Retractable Zero coupon/ Strip Junk/ high yield/ non investment grade Eurobonds Inflation linked Puttable Floating Preferred stock ….

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BondsTypes (Innovations)

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Inverse Floaters Asset-Backed Bonds Catastrophe Bonds Indexed Bonds

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Bondsmore …

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The indenture Call provisions Sinking Funds Private Placements Bankruptcy, Distressed Securities

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Bond Ratings

Bonds of the same maturity offer a different rate of return

Why ?Due to the risk of defaultThe difference between the return on “safe”

bonds (i.e. government) and “risky” bonds is called a default premium

How do you assess risk ?Moodys and S&P - evidence suggest that low

ranked bonds promise higher returns

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Bond Ratings

Since the primary function of bonds as an investment vehicle is to make fixed payments, it's essential that the company or government issuing the debt has the ability to make all payments on time and in full. Bond ratings evaluate the debt issuer to determine the risk of default

The leading rating agencies, Standard & Poor's and Moody's Investors Services, assign ratings when a bond is first issued, and that rating helps determine how high the bond's interest rate will be. If the agencies assign a high rating, that means there's little risk of default, so the issuer can obtain a lower interest rate

While the rating systems of Moody's and S&P differ somewhat, they're more alike than different. Both agencies have investment-grade ratings, which connote a high level of creditworthiness, and speculative ratings, which mean higher risk levels and merit higher interest rates

Here are Moody's ratings, from highest to lowest. Investment grade: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3. Speculative grade: Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C1

Here are S&P's ratings. Investment grade: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-. Speculative grade: BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, D

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Thank you

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