Bonds and Fixed Income Securities

1
Bonds and Fixed Income Securities

• What is a bond?
• A Bond is the basic fixed income security that
  obligates the issuer to make specified interest
  and principal payments to the holder on specified
  dates
• Three key characteristics of bonds
• The bond coupon
• Par value of the bond
• Maturity or term of the bond
• Characteristics of the Bond Market
• WSJ listing
• Listed, but sold through dealers
• Market is thin

2
Types of Bonds

• Pure Discount or Zero Coupon Bonds
• Coupon Bonds
• Perpetual Bonds
• Self Amortizing Bonds
• Convertible Bonds
• Putt-able Bonds
• Floating Rate Bonds
• Foreign Bonds
• Eurobonds

3
Who Issues Bonds?

• The Federal Government
• Treasury bills
• Treasury notes
• Treasury bonds
• Treasury strips
• Agency Bonds
• Mortgage backed bonds
• Municipal Bonds
• Corporate Bonds
• Secured bonds
• Debentures

4
Bond Pricing

• Bond Pricing price is based on the present
  value of the stream of income to the bondholder.
  There are two streams on income, the coupon
  payments and the par value of the bond at
  maturity
• Bond Value PV of coupon payments PV of Par
  Value
• Assume one market interest rate for all periods
• Discount rate real risk free rate inflation
  factor risk premium
• (see bond calculator example)

5
Bond Yields Defined

• Current Yield
• Yield to Maturity
• Bond Equivalent Yield
• Effective Annual Rate

6
Bond Yields An Example

• Consider the following bond
• Coupon rate 8
• Term 30 years
• Par Value 1,000
• Current price 1,276.76
• What is the
• Current Yield?
• Yield to Maturity?
• Bond equivalent Yield?
• Effective Annual Yield?