FIXED INCOME ANALYSIS
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OFFICE 267 (SKEMA)
Assistant : Sandrine Charron 04 93 95 45 18
•FINANCIAL TIMES INTERNATIONAL CAPITAL MARKET
•ADVANCED CALCULATOR
•ALL INFO ON CLASS ON «KNOWLEDGE »
WHAT IS A BOND ?
A BOND IS A DEBT INSTRUMENT REQUIRING THE ISSUERTO REPAY TO THE LENDER/INVESTOR THE AMOUNTBORROWED PLUS INTEREST OVER A SPECIFIC PERIOD OFTIME
MATURITY DATE
THE TERM TO MATURITY OF A BOND IS THE NUMBEROF YEARS OVER WHICH THE ISSUER HAS PROMISED TO MEET THE CONDITIONS OF THE OBLIGATION.
SHORT-TERM : 1-5 YEARS
INTERMEDIATE : 5-12 YEARS
LONG –TERM: >12 YEARS
PRINCIPAL + COUPON RATE
THE PRINCIPAL OF A BOND IS THE AMOUNT THAT THEISSUER AGREES TO REPAY THE BONDHOLDER AT THE MATURITY DATE. (face value)
THE COUPON RATE IS THE RATE OF INTEREST THATTHE ISSUER AGREES TO PAY EACH YEAR.(Example : a bond with an 8% coupon and a principal of $1000 willpay annual interest of $ )
WHAT ARE ZERO-COUPON BONDS ?
80
FLOATING RATE BONDS : BONDS WHOSE COUPONS ARE RESET PERIODICALLY ACCORDING TO A PREDETERMINEDBENCHMARK.
FIXED RATE BONDS : BONDS WHOSE COUPONS ARE FIXED THROUGHOUT THE LIFE OF THE BOND.
CURRENT YIELD
COUPONCurrent Yield = --------------
Bond Price
Deficient way to evaluate a bond because it does not take into accountthe principal to be paid at maturity.
YIELD TO MATURITY
RATE OF INTEREST AN INVESTOR WOULD GET IF :
•BOND IS HELD TO MATURITY
•ALL COUPONS ARE REINVESTED AT CURRENT RATE
•YTM IS THE DISCOUNT RATE AT WHICH THE PRESENT VALUE OF FUTURE PAYMENT = PRICE OF THE SECURITY
YIELD TO MATURITY
This is the rate at which you compare each bond within :• Its maturity• Its rating
PRICE QUOTES
•THE PRICE OF BONDS ARE QUOTED AS PERCENTAGE OF FACE VALUE
• A BOND WITH A FACE VALUE OF $1000 AND A PRICE OF 91 ¾ (% of face value) HAS A MARKET VALUE OF $ $917.50
CALL AND REFUNDING PROVISIONS
• A CALL PROVISION GIVES THE ISSUER THE RIGHT TO RETIRE THE DEBT, FULLY OR PARTIALLY, BEFORE THE SCHEDULED MATURITY.
WHY WOULD A COMPANY DECIDE TO BUY BACK ITS DEBT ?
WOULD A CALLABLE BOND HAVE A HIGHER OR LOWERYIELD THAN A NON-CALLABLE BOND ? WHY?
THE CALL PRICE IS USUALLY HIGHER OR EQUAL THAN THE PRINCIPAL:
CALL PREMIUM
THE CALL FEATURES ARE STATED AT THE ISSUANCE OF THE BOND.
CALL PROTECTION PERIOD : BOND CANNOT BE CALLED BEFORE THAT DATE
CONVERTIBLE BONDS
A CONVERTIBLE BOND IS A BOND THAT CAN BE EXCHANGED FORSPECIFIED AMOUNT OF COMMON STOCK IN THE ISSUING FIRM.
CONVERSION RATIO vs. CONVERSION PRICE
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