seminar: timely topics for today’s business world mr. bernstein bonds (aka fixed income) december...

Seminar: Timely Topics for Today’s Business World

Mr. Bernstein

Bonds (aka Fixed Income)

December 22, 2014

2

BondsBond is a contract to repay a loan on a given maturity date.Face value = final payout ( ~ loan amount)Bonds are traded Over the Counter (OTC) – there is no meaningful exchange


Mr. Bernstein

3

Types of BondsDebentures, or unsecured bonds, are backed only by the

reputation of the issuer. Most corporate bonds are debentures

Mortgage bonds are backed by a lien on a home or other real estate

Secured bonds are backed by a lien on collateralConvertible bonds can be converted into stockBond contracts may have other provisions called covenantsJunior debt is subordinated to senior debtFloaters have coupons which adjust with interest rates


Mr. Bernstein

4

Why Buy Bonds?Interest IncomeCapital Gains

When interest rates fall, bond prices riseWhen interest rates rise, bond prices fall


Mr. Bernstein

5

Why Buy Bonds?Interest Income

Current Yield = Annual Income / PriceCapital Gains



Mr. Bernstein

6

Why Buy Bonds?Interest IncomeCapital Gains


Example: Exxon 5% due 4/5/2023…at 5% yield bond price =100. At 4% yield bond price = 110. Why? 5% coupon is reduced by capital loss of 10% over ten years, or 1% per year.


Mr. Bernstein

7

Why Buy Bonds?Yield to Maturity =

Coupon Income + (Pymt at maturity - Price Paid)Price Paid

Yield to Maturity is the primary measure of a bond’s value


Mr. Bernstein

8

Bond RatingsRatings Agencies rate bonds based on the

likelihood of repayment at maturityMoody’s, Standard & Poor’s and Fitch are the

three major Rating AgenciesBonds are rated from D to AAABBB and above are “Investment Grade”BB and below are “High Yield” or “Junk” bonds


Mr. Bernstein

9

Bond RatingsRatings Agencies are paid by issuers of new

bonds, i.e. corporations, finance companiesIs this a conflict of interest?Can investors rely on ratings?


Mr. Bernstein

10

Bond PricingInvestors generally demand more yield for:

Higher perceived risk of repaymentHigher perceived risk of inflationLonger maturities

Relative value is determined by the difference between the Yield to Maturity and the yield on a comparable maturity US Treasury bond (the Spread to Treasuries)

Corporate Bond Price Information (FINRA)http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/

Default.aspx


Mr. Bernstein

11

Bond PricingTo receive a higher yield to maturity, what

component of the Yield to Maturity formula must change?

Yield to Maturity = Coupon Income + (Pymt at maturity - Price Paid)

Price Paid


Mr. Bernstein

seminar: timely topics for today’s business world mr. bernstein bonds (aka fixed income) december...

Documents