Fixed Income securities slide 1

• Fixed income security


  A financial obligation of an entity that obligates the issuer to promise specified interest and principal payments to the holder on specified dates
• Bond


  A contractual agreement between the issuer and the bondholders
• Difference between fixed income securities and equity securities

  • Unlike common shares in which investors have ownership rights, the promised payments on fixed income securities are contractual (legal) obligations of the issuer to the investor
  • Bondholders have prior claim on the company's earnings and assets compared with the claim of common shareholders
  • A company's fixed-income securities tend to have lower risk than that of company's common shares
• A swap is not a fixed income security
• Bond features


  • Issuer
  • Maturity
  • Par value
  • Coupon rate and frequency
  • Currency denomination
• Current yield


  Yield measure
• Yield to maturity


  Yield measure
• Legal considerations in bond indenture


  • The legal identity of the bond issuer and its legal form
  • The source of repayment proceeds
  • The asset or collateral backing
  • The credit enhancements
  • The covenants - Affirmative/Negative
• Domestic bonds


  Bonds issued by entities that are incorporated in that country
• Foreign bonds


  Bonds issued by entities that are incorporated in another country
• Eurobonds


  Bonds issued and traded on the Eurobond market, usually unsecured and can be denominated in any currency, underwritten by an international syndicate
• Tax considerations


  • Tax rate on income
  • Capital gains tax
• Principal repayment structures


  • Bullet
  • Fully Amortised
  • Partially Amortised
  • Balloon Payment
  • Sinking Funds Arrangements
• Coupon payment structures


  • Fixed rate coupons
  • Floating rate coupons
  • Step-up coupon bonds
  • Credit-linked coupon bonds
  • Payment in Kind Bonds
  • Deferred Coupon Bonds
  • Index-linked bonds
• Index-linked security


  Security where payments are increased in line with an index
• Types of index-linked bonds

  • Zero-coupon indexed bonds
  • Interest-indexed bonds
  • Capital-indexed bonds
  • Indexed-annuity bonds-fully amortising
• Embedded options in bonds

  • Callable bond
  • Putable bonds
  • Convertible bond
• Types of callable bonds


  • American-style call
  • European-style call
  • Bermuda-style call
• Convertible bond


  Bonds that give bondholders the right but not the obligation to convert their bonds into a predetermined number of shares at predetermined dates prior to the bond's maturity
• Conversion price


  The price per share at which ordinary shares will be exchanged for a convertible debt
• Conversion ratio


  The number of ordinary shares into which a convertible bond can be converted
• Straight bond value


  What the convertible bond would sell for if it could NOT be converted into ordinary shares
• Convertible value


  What the bond would be worth if it were immediately converted into ordinary shares
• Reading assignment: Part Eight of the core text, The Handbook of Fixed Income Securities by Abozzi, F. J., & Mann, S. V. (2012), McGraw Hill Professional, ISBN: 0071768467
• Credit ratings reflect an issuer's ability to meet its financial obligations on time and in full.