Bonds Fixed Income

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Bonds Fixed Income

• Govs or Corps borrow in the capital markets
• You are the Lender
• Fixed rate of return over a specified time period
• Can also be variable tied to a benchmark (LIBOR)

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Types of Bonds

• Govt. Bonds Risk-free (Rf)
• Zero coupon (Discount)
• Agencies FNMA, CMOs
• Munis Various tax-exempt
• Corps Yield depends on Rating
• Callable
• Convertibles
• Most pay semi-annual coupons

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Bond Ratings (Corps)

• Standard Poors
• Moodys
• AAA to Junk
• Investment Grade
• Ratings tend to be reactive not proactive

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Rating Factors

• Debt as pct. Of capital
• Revenue volatility
• Cost structure
• Interest Coverage
• Default Risk
• Spreads increase as quality decreases

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Yield Curve
Yield
Avoid Flat Part
Price Protection
Ride the curve down
30-Yr
1
Yrs to Maturity
10
8
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Bond Pricing

• TVM
• Rd Rf DRP
• Rd up Price down
• Rd down Price Up
• Inverse Pricing Relationship
• 1 Bond 1,000
• Par 100
• ATT 6s of 08 (coupon maturity)

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