Bonds

• A bond is a loan made by an investor to a borrower. The borrower agrees to repay the loan, plus interest, over a specified period of time. Bonds are considered to be a fixed-income investment, which means that the interest payments and principal repayments are fixed.
• Types of Bonds


  • Government Bonds
  • Corporate Bonds
• Supranational


  Something that exists or operates above the level of national governments, typically involving multiple nations or regions
• Examples of Supranational Organisations

  • EU
  • WTO
  • ASEAN
  • NATO
  • UN
• Government Bonds in India

  • Tamil Nadu Generation and Distribution Corporation Limited
  • Karnataka State Financial Corporation
  • West Bengal State Electricity Distribution Company Ltd
  • Indel Money Limited
  • Punjab Infrastructure Development Board
  • Rajasthan State Road Transport Corporation
  • Rajasthan Rajya Vidyut Prasaran Nigam Ltd
  • Tamil Nadu Generation and Distribution Corporation Limited
  • West Bengal State Electricity Distribution Company Ltd
• Zero-coupon bonds


  These bonds do not pay interest periodically. Instead, the investor buys the bond at a discount to its face value and receives the full-face value when the bond matures.
• Municipal bonds


  These are the bonds issued by the local governments to fund projects such as building schools, hospitals, and roads. Municipal bonds may be exempt from local and state taxes as well.
• High-yield bonds


  Also known as junk bonds, such bonds are issued by companies having low credit ratings. High-yield bonds offer higher returns than other types of bonds, but they are also the riskiest type of bond since there is a higher chance of default by the issuer.
• Convertible bonds


  Convertible bonds blend features of debt and equity. Issued by companies to raise capital. Bondholders can convert bonds into a predetermined number of company shares. Conversion price set at a premium to stock price. Pay periodic interest like traditional bonds. Have fixed maturity date. Some may be callable by the issuer.
• Floating-rate bonds


  These bonds have a variable interest rate that changes based on the benchmark interest rate, for example, the London Interbank Offered Rate (LIBOR).
• Interest Rate Benchmarks in the World

  • LIBOR (London Interbank Offered Rate)
  • EURIBOR (Euro Interbank Offered Rate)
  • SOFR (Secured Overnight Financing Rate)
  • T-Bills (Treasury Bills)
  • Treasury Yield Curve
  • SIBOR (Singapore Interbank Offered Rate)
  • HIBOR (Hong Kong Interbank Offered Rate)
  • IBOR (Interbank Offered Rate)
• Interest Rate Benchmarks in India

  • MIBOR (Mumbai Interbank Offered Rate)
  • MIFOR (Mumbai Interbank Forward Offer Rate)
  • G-Sec Yields (Government Securities Yields)
  • T-Bills (Treasury Bills)
  • Prime Lending Rate (PLR)
  • Repo Rate
  • Base Rate and MCLR (Marginal Cost of Funds Based Lending Rate)
• Bond


  A loan, with the investor lending to the borrower in return for the promise to have the loan repaid on a fixed date and (usually) a series of interest payments
• Bond Features


  • Nominal Value (par or face value)
  • Coupon (interest paid per year as a percentage of face value)
  • Redemption date (maturity date)
  • Price (traded price on stock exchange)
  • Value (nominal amount x current price)
• Advantages of Investing in Bonds

  • Predictable returns
  • Lower risk
  • Diversification
  • Tax advantages
  • Stability
• Disadvantages of Investing in Bonds


  • Market volatility
  • Fluctuation of interest rate
  • Change in the issuer's financial stability
  • Not best for short-term investment
• Bonds


  Debt instruments that allow investors to lend money to an entity (typically a government or company) in exchange for regular interest payments and the return of the principal amount at maturity
• Bonds provide exposure to the bond market for investors, affecting professional investors like insurance companies, banks, and pension funds
• Bond markets in India


  • Less developed than equity markets due to lack of centralized exchange, market regulators, and fewer market participants
  • Bondholders face capital risk in case of issuer bankruptcy or liquidation
  • Issuer liquidity issues can hamper bondholder's interest or principal repayment
• Short-term bond investment


  Not recommended as investors have to pay penalty (equal to three months of interest) if issuer cashes out before five years
• Bond liquidity


  • Bonds are tradable but have withdrawal restrictions and liable to fees/penalties if creditors want to withdraw before maturity
• Bond returns


  • Fixed-rate bonds pay predetermined interest, floating-rate bonds have returns that fluctuate based on benchmark rates
  • Long-term bond investment returns in India can be less than for equities
• Risks associated with holding bonds

  • Early redemption risk
  • Seniority risk
  • Inflation risk
  • Liquidity risk
  • Exchange rate risk
• Credit rating agencies


  Assess credit/default risk and extent of loss for bond issuers
• Major credit rating agencies in India

  • CRISIL
  • ICRA
  • CARE
  • India Ratings and Research
  • Brickwork Ratings
• Credit rating categories in India

  • AAA or A1+: Highest credit quality, very low risk
  • AA or A1: High credit quality, low risk
  • A or A2: Adequate credit quality, moderate risk
  • BBB or A3: Moderate credit quality, higher risk
  • BB or B: Speculative or below investment grade, relatively high risk
• Factors influencing credit ratings

  • Payment history
  • Credit utilization
  • Credit history length
  • Types of credit
  • New credit
• Credit score vs credit rating

  Credit score: Three-digit number representing individual's creditworthiness

  Credit rating: Letter grades/symbols assigned by agencies to assess creditworthiness of entities or financial products
• Bonds issued based on credit ratings

  • Investment grade: Greatest liquidity and payment certainty

  Non-investment grade/speculative (junk bonds): Higher risk
• Types of US government bonds

  • Treasury bills
  • Treasury notes
  • Treasury bonds
  • Treasury inflation-protected securities (TIPS)
  • Municipal bonds
  • STRIPS
• UK government bonds (gilts)

  Conventional gilts have fixed coupon and redemption date

  Index-linked gilts have coupon and redemption adjusted for inflation

  Classified by years to redemption: ultra short, short, medium, long, ultra-long
• UK gilt settlements


  • Traded for next-day settlement, settled electronically by book entry, interest paid semi-annually
• Main types of German government bonds

  • Bunds (longer-term)
  • Schatz (2-year maturity)
  • Bobls (5-year maturity)
• German government bond market

  • Bund market is large and liquid, sets benchmark for other European bonds

  Domestic trades settle T+2, international trades follow Eurobond T+2 practice

  Interest paid annually
• Types of Chinese government bonds

  • Sovereign bonds issued by Ministry of Finance

  Policy bank bonds issued by China Development Bank, Agricultural Development Bank, Export-Import Bank
• Bobls


  Issued with five-year maturities
• Bunds


  Issued with maturities of between eight and 30 years, but the most common maturity is ten years
• Bund market


  • Large and liquid, and the yield on Bunds sets the benchmark for other European government bonds
• Domestic trades


  Settle two business days after trade date
• Settlement of international trades

  Follows the practice in the Eurobond market and is for T+2 settlement, that is two business days after the trade date