Treasury Bond (T-Bond)

Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal

government that have maturities greater than 20 years. T-bonds earn periodic interest until
maturity, at which point the owner is also paid a par amount equal to the principal.
Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as
treasuries, which are typically regarded as virtually risk-free since they are backed by the U.S.
government's ability to tax its citizens.
Treasury bonds (T-bonds) are fixed-rate U.S. government debt securities with a maturity range
between 10 and 30 years. T-bonds pay semiannual interest payments until maturity, at which
point the face value of the bond is paid to the owner.
T-bonds are backed by the U.S. government, and the U.S. government can raise taxes and
increase revenue to ensure full payments. These investments are also considered benchmarks in
their respective fixed-income categories because they offer a base risk-free rate of investment
with the categories' lowest return. T-bonds have long durations, issued with maturities of
between 20 and 30 years.
As is true for other government bonds, T-bonds make interest payments semiannually, and the
income received is only taxed at the federal level. Treasury bonds are issued at monthly online
auctions held directly by the U.S. Treasury. A bond's price and its yield are determined during
the auction. After that, T-bonds are traded actively in the secondary market and can be
purchased through a bank or broker.
Individual investors often use T-bonds to keep a portion of their retirement savings risk-free, to
provide a steady income in retirement, or to set aside savings for a child's education or other
major expenses. Investors must hold their T-bonds for a minimum of 45 days before they can
be sold on the secondary market.
Basic features
Maturity Ranges
Treasury bonds are issued with maturities that can range from 20 to 30 years. They are issued
with a minimum denomination of $100, and coupon payments on the bonds are paid
semiannually. The bonds are initially sold through an auction; the maximum purchase amount is
$5 million if the bid is noncompetitive (or 35% of the offering if the bid is competitive).
A competitive bid states the rate the bidder is willing to accept; it is accepted depending on how
it compares with the set rate of the bond. A noncompetitive bid ensures the bidder gets the
bond, but they have to accept the set rate. After the auction, the bonds can be sold in
the secondary market.
Secondary Market
There is an active secondary market for T-bonds, making the investments highly liquid. The
secondary market also makes the price of T-bonds fluctuate considerably in the trading market.
As such, current auction and yield rates of T-bonds dictate their pricing levels on the secondary
market. Similar to other types of bonds, T-bonds on the secondary market see prices go down
when auction rates increase because the value of the bond’s future cash flows is discounted at
the higher rate. Inversely, when prices increase, auction rate yields decrease.
Yields
In the fixed-income market, T-bond yields help to form the yield curve, which includes the full
range of investments offered by the U.S. government. The yield curve diagrams yield by
maturity, and it is most often upward sloping (with lower maturities offering lower rates than
longer-dated maturities). However, the yield curve can become inverted when long-term rates
are lower than short-term rates. An inverted yield curve can signal an upcoming recession.

Agency Bonds

An agency bond is a security issued by a government-sponsored enterprise or by a federal

government department other than the U.S. Treasury. Some are not fully guaranteed in the same
way that U.S. Treasury and municipal bonds are. An agency bond is also known as agency debt.
 Federal government agency bonds and government-sponsored enterprise bonds pay
slightly higher interest than U.S. Treasury bonds.
 Most, but not all, are exempt from state and local taxes.
 Like any bonds, they have interest rate risks.
Agency bonds, also known as agency debt, is the debt issued by a government-sponsored
enterprise (GSE) or a federal agency. The key difference between a GSE and a federal agency is
that a GSE’s obligations are not guaranteed by the government, whereas a federal agency’s debt
is backed up by a government guarantee.
There are two types of agency bonds, including federal government agency bonds and
government-sponsored enterprise (GSE) bonds.
Federal Government Agency Bonds
Federal government agency bonds are issued by the Federal Housing Administration (FHA),
Small Business Administration (SBA), and the Government National Mortgage Association
(GNMA). GNMAs are commonly issued as mortgage pass-through securities.
Like Treasury securities, federal government agency bonds are backed by the full faith and
credit of the U.S. government. An investor receives regular interest payments while holding this
agency bond. At its maturity date, the full-face value of the agency bond is returned to the
bondholder.
Federal agency bonds offer a slightly higher interest rate than Treasury bonds because they are
less liquid. In addition, agency bonds may be callable, which means that the agency that issued
them may decide to redeem them before their scheduled maturity date.
Government-Sponsored Enterprise Bonds
A GSE is issued by entities such as the Federal National Mortgage Association (Fannie
Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding
Corporation, and the Federal Home Loan Bank.
These are not government agencies. They are private companies that serve a public purpose, and
thus may be supported by the government and subject to government oversight.
GSE agency bonds do not have the same degree of backing by the U.S. government as Treasury
bonds and government agency bonds. Therefore, there is some credit risk and default risk, and
the yield offered on them typically higher.
To meet short-term financing needs, some agencies issue no-coupon discount notes, or “discos,”
at a discount to par. Discos have maturities ranging from a day to a year and, if sold before
maturity, may result in a loss for the agency bond investor.
 Government-sponsored enterprise bonds do not have the same degree of backing by the U.S.
government as Treasury bonds and other agency bonds.
Agency bond is typically issued through broker-dealers. Some well-known broker-dealers, such
as J.P. Morgan, Nomura, and BNY Mellon, participate in the market by underwriting agency
debt. They buy agency debt wholesale at a discount, then sell the debt to investors in
the secondary market at a higher price.
Below are the important features of agency bonds:
 Low risk: Agency bonds are considered very safe and typically come with high credit
ratings.
 Higher return: They provide higher returns relative to treasuries, which are considered
risk-free.
 Highly liquid: They are actively traded and hence, are highly liquid.
 Coupon: The bond pays a fixed annual coupon of 2.10%. The payments are made semi-
annually (i.e., every six months), as shown by the coupon frequency.
 Call Provision or Redemption: The bond is callable, which means the issuer owns the
option to buy it back at a pre-specified time (the redemption date) at the redemption
price.
 Investing in Agency Debt: Just like any investment vehicle, agency debt comes with its
advantages and disadvantages. In addition, tax considerations must be taken into account.
 Advantages:
- Low risk and higher returns: Agency debt is considered to come with low default risk
even when it is not backed up by the government. It provides higher returns relative to
treasuries, which are considered default-free.
 High liquidity: Agency debt is actively traded and can be bought or sold without a high
transaction cost.
 Disadvantages:
- Inflation risk and costs: Returns from holding agency debt are reduced in a high
inflation environment or if the transaction costs are too high.
- Interest rate risk: Just like any debt security, agency debt will likely fluctuate in price
due to interest rate changes.
 Complexity: Agency debt is offered in a variety of structures, with some being more
complex than others. It is difficult to analyze different structures and decide if agency
debt is suitable for one’s portfolio.
  Tax Considerations It is important to differentiate between GSE and federal agency debt
for tax purposes as well. Interest earned on GSE debt is not tax-exempt, while interest on
federal agency debt is tax-exempt. It is an important detail as tax may exert a significant
effect on a company’s investments.
How Agency Bonds Work
Most agency bonds pay a semi-annual fixed coupon. They are sold in a variety of increments,
generally with a minimum investment level of $10,000 for the first increment and $5,000 for
additional increments. GNMA securities, however, come in $25,000 increments.
Some agency bonds have fixed coupon rates while others have floating rates. The interest rates
on floating rate agency bonds are periodically adjusted according to the movement of a
benchmark rate, such as LIBOR.
Like all bonds, agency bonds have interest rate risks. That is, a bond investor may buy bonds
only to find that interest rates rise. The real spending power of the bond is less than it was. The
investor could have made more money by waiting for a higher interest rate to kick in. Naturally,
this risk is greater for long-term bond prices.

Municipal bonds
key features
 Interest Rate - The issuer pays interest to bond investors in exchange for the use of the
loaned money. The interest rate is a percentage of the principal (the amount
borrowed/invested), accruing over a specified period (typically, semiannually). Interest
rates vary depending on the term and prevailing bond market conditions and may be fixed
or variable. Fixed interest rates are set on the pricing date.
 Price - The price is the amount investors are willing to pay for a bond initially or in the
secondary market. Price is based on certain variables, including current market yields,
supply and demand, credit quality, term to maturity, and tax status. Price and yield move
in opposite directions. When market yields increase, the price or value of a bond
decreases, and vice versa.
 Yield - The yield refers to the rate of return an investor earns on the bond based on the
price and interest rate. Yield can be calculated in different ways to reflect differing
assumptions and investors should consult their brokers or financial advisors to learn more
about yield.
 Maturity Date - Maturity date refers to the date when the principal on the bond is
scheduled to be repaid to the investor.
 Redemption Provisions - Some bonds contain provisions that allow the issuer to redeem
or "call" all or a portion of the bonds or notes, at specified prices, prior to their stated
maturity date. 
 Ratings/Credit - A credit rating is an evaluation of an issuer's credit quality based
primarily on its current and projected financial and economic conditions.  A credit rating
is an independent assessment of the creditworthiness of the bonds.  It measures the
 probability of timely repayment of principal and interest of a bond or note.  Higher credit
ratings indicate the rating agency’s view that there is a greater probability the investment
will be repaid. Most bonds are rated by one or more of the three major rating agencies:
Standard & Poor’s, Moody’s Investor's Service, and/or Fitch Ratings. Investors are
advised to obtain and review the credit reports associated with a bond offering prior to
making an investment decision.
 Denominations - fixed interest rate bonds are typically sold in a minimum denomination
of $5,000 and whole multiples thereof.
 Debt service - refers to the payment of principal and interest on outstanding bonds

Corporate Bonds

Corporate bonds are debt obligations issued by corporations. They pay an annual coupon
(interest) payment that is typically fixed until the maturity of the bond.
Some corporate bonds are step-up coupon bonds, which means that it is spelled out in the
indenture that the bond coupon rate (and therefore interest payment) will adjust at set periods
during the bond life. These bonds are attractive to investors during low interest rate
environments to protect against rising rates.
Some corporate bonds are callable meaning that the company can repay the bond early. The
company may want to do this if interest rates fall much the same way homeowners refinance a
mortgage.
While most corporate bonds are obligated to pay interest or face sanctions from
bondholders, income bonds require the issuer to only pay interest if income is available.
Companies issuing such bonds would be required to offer higher interest to compensate investors
for this added risk.
Zero-coupon bonds pay no interest and are instead sold at a discount to face value. For
example, an investor may pay $800 for a 5-year bond and receive $1,000 back in 5 years with no
payments prior to that time.
Corporate bonds are fully taxable. Because corporations face the possibility of default, they are
rated by risk with the lowest risk bonds being rated AAA. Bonds rated BB or lower must offer
higher interest to attract investors and are thus called high-yield (or junk) bonds.
Corporate bonds are the debt securities issued by Corporate entities such as private firms, public
sector units, and banks. Investors receive regular interest payouts at predetermined time intervals
and receive their principal amount on the maturity of the bonds. To understand the Corporate
Bond Market, we need to know the features of Corporate Bonds.
The primary purpose of issuing corporate bonds is to raise capital for business operations and
expansion without diluting its ownership. Bonds provide regular income to bondholders, and
corporate bonds offer higher coupon rates. Additionally, via corporate bonds, the money in
abundance with investors flows towards businesses leading to economic growth.
 
Few important features of Corporate Bonds  
Higher Coupon Rates
Corporate bonds offer higher coupon rates than G-secs. G-secs offer coupons of around 6%,
whereas corporate bonds offer approximately between 7% (AAA rated) to 12% (A rated)
coupons in the current scenario (The year 2021)
Have Shorter Tenures compared to G-secs
Tenure is the period during which the bondholder receives interest payments. Once a  bond
matures, the investor receives the principal amount. Till maturity, the issuer owes money to the
investor, and on the maturity date of the bond, the principal amount is repaid along with any
outstanding interest, and the contract gets terminated. Compared to Gsecs, corporate bonds have
a shorter tenure. 
Moderate to Liquidity 
The liquidity of security describes the ease of selling it without negotiating on the price. The
corporate bond market’s liquidity via OTC can be said as moderate to high (based on the specific
bond). 
Credit Rating 
The credit rating is an evaluation of prospective debtors and their debt securities such as bonds
and debentures. In India, “AAA” to “BBB” rated bonds are considered investment-grade bonds,
and bonds rated below “BBB” are considered junk-grade bonds. 
Call Provision
Few bonds come with a unique feature, i.e., call provision. This allows the issuer to buy back the
bonds before maturity. All perpetual bonds come with this call provision. To reduce borrowing
costs, issuers usually call back these bonds and raise funds at a lower interest rate. When bonds
are called, then the issuer pays back the principal and unpaid interest, if any. 
Bond insurance
Here an insurance company insures the scheduled payments of interest and principal to the
investor. This is called “financial guarantee insurance.”
Advantages
Corporate bonds offer higher coupons. They are slightly riskier than Gsecs yet safer than
equities. They come with a shorter maturity, and they are liquid in nature. 
Disadvantages
The associated risk with Corporate Bonds is higher than G-secs. In the long run, the returns from
corporate bonds can be lesser than that of equities. At times, the availability of specific bonds in
the secondary market may fluctuate. 
Risks associated with Corporate Bonds 
Default risk is the loss the investor incurs when the issuer fails to pay the interest or principal on
the debt obligations. The number of corporates failing to meet their debt obligations is scarce;
nevertheless, default risk is a significant risk that can dampen investor’s sentiment.  
 Interest rate risk: Interest Rate Risk is the risk of getting a lower sell price than the price
at which the bondholder bought the bonds in the first place.
  Liquidity risk: This is the risk that an investor may face if he tries to sell bonds before
maturity and fails to get buyers. 
 Reinvestment risk: This is the loss that an investor can incur when he receives a lump
sum payment of principal and cannot find investment instruments with good returns. 
 Call Risk: Call provision is a privilege that can be leveraged only by the issuer; hence
after bonds are called, the investor won’t be getting any interest payout. This can reduce
their effective yield.
 Inflation risk:  Rising inflation causes bond prices to fall and bond yields to rise. So with
rise in inflation, bondholders will see the market value of their bond investment reducing.
Holding the bonds till maturity (HTM) shields the investors from this risk completely.
Asset-backed securities (ABS) are securities derived from a pool of underlying assets. To
create asset-backed securities, financial institutions pool multiple loans into a single security that
is then sold to investors.
 The pools can include many types of loans, such as mortgages, credit card debt, student loans,
and auto loans. As many of the loans cannot be sold separately, securitizing them into asset-
backed securities provides investors with further investment opportunities, and allows financial
institutions to remove risky assets from their balance sheets.
 Asset-backed securities (ABS) are securities derived from a pool of underlying
assets.
 Asset-backed securities are characterized by a diversified risk profile, as each
security only contains a fraction of the total pool of underlying assets.
 When purchasing and asset-backed security, the investor receives all interest and
principal payments but also takes on the risk of the underlying assets.
 
Understanding Asset-Backed Securities
Asset-backed securities are essentially pools of smaller assets held by various financial
institutions, such as banks, credit unions, and other lenders. Most of the assets are loans provided
to individuals in the form of mortgages, credit card debt, or auto loans. Since the loans provide
the lender with interest and principal payments, they are assets on the lender’s balance sheet.
However, the assets are often small and illiquid and cannot be sold to investors individually.
Therefore, financial institutions will pool multiple assets together through a process known as
securitization. The process results in new securities with a diversified risk profile, as each
security only contains a fraction of the total pool of underlying assets. The interest and principal
payments on the assets are also passed on to the investor, as well as the risk.
 
Securitization of Assets
To create asset-backed securities, loans and other forms of debt are pooled together in a process
known as securitization. Securitization can take place with many types of loans, such as
commercial and residential mortgages, auto loans, consumer credit card debt, and student loans.
The original interest and principal payments are passed on to the investors, while the risk of
default is minimized as each asset-backed security only contains a fraction of each underlying
asset. Each pool is separated based on the level of risk, as well as the return. Lower-risk assets
can result in lower interest payments, while riskier assets may provide a higher yield.
 Features of Asset-Backed Securities
1. It Protects from potentially risky loans
For the lender that issues asset-backed securities, the benefit is that potentially risky loans are
removed from their balance sheet, as they’ve been securitized and sold to outside investors. By
selling the assets through asset-backed securities, they are also able to gain a new source of
funding that can be used to issue more loans or for other business purposes.
2. It Provides an alternative and more stable investment vehicle
For investors, asset-backed securities provide an alternative investment vehicle that provides
higher yields and greater stability than government bonds. Asset-backed securities also provide
portfolio diversification for investors looking to invest in other markets. Also, not all investors
can lend directly to consumers through mortgages or credit cards.
3. It Reduces default risk and other credit risks
By purchasing asset-backed securities, investors can receive access to interest and principal
payments of various assets without having to originate them. Since each security only contains a
fraction of all the underlying assets, the risk of default and other credit risks are minimized.
4. It Lacks due diligence
When investors purchase the securities, there can be hundreds of underlying assets. It can be
difficult to evaluate the credit risk of the underlying assets without conducting extensive
research. For retail investors, it may not be possible to conduct such a level of due diligence, and
therefore, they may be exposed to unforeseen risks.
5. It Lowers yield from prepayments
Asset-backed securities may also be subject to prepayment risks, which occur when the
borrowers of the underlying assets decide to pay off their loans early. It can result in a lower
yield for holders of the security.
6. Its Potentially widespread defaults during an economic downturn
Finally, some risks can arise if the underlying assets are in arrears. Since each security only
contains a fraction of each underlying asset, the risk of default is distributed across a wide range
of assets. However, if the underlying assets are of low quality, the security can suffer from
widespread defaults during an economic downturn.

Mortgage-Backed Securities (MBS)

Most mortgage-backed securities are issued by Ginnie Mae (the Government National Mortgage
Association), Fannie Mae (the Federal National Mortgage Association), or Freddie Mac (the
Federal Home Loan Mortgage Corporation), which are all U.S. government-sponsored
enterprises.
MBS from Ginnie Mae are backed by the full faith and credit of the U.S. government, which
guarantees that investors receive full and timely payments of principal and interest. In contrast,
Fannie Mae and Freddie Mac MBS are not backed by the full faith and credit of the U.S.
government, but both have special authority to borrow from the U.S. Treasury if necessary. 2
Mortgage-backed securities can be purchased at most full-service brokerage firms and some
discount brokers. The minimum investment is typically $10,000; however, there are some MBS
variations, such as collateralized mortgage obligations (CMOs), that can be purchased for less
than $5,000. Investors that don't want to invest directly in a mortgage-backed security but want
exposure to the mortgage market may consider exchange-traded funds (ETFs) that invest in
mortgage-backed securities. 

Both ABS and MBS have prepayment risks, though these are especially pronounced for MBS.
Prepayment risk means borrowers are paying more than their required monthly payments,
thereby reducing the interest of the loan. Prepayment risk can be determined by the current and
issued mortgage rate difference, housing turnover, and mortgage rates. 
For instance, if a mortgage rate begins at 9%, drops to 4%, rises to 10%, and then falls to 5%,
homeowners would likely refinance their mortgages the first time the rates dropped. Therefore,
to deal with prepayment risk, ABS and MBS have tranching structures to help distribute
prepayment risk. Investors can choose a tranche based on their own preferences and risk
tolerance.
One additional type of risk involved in ABS is credit risk. ABS has a senior-subordinate
structure to deal with credit risk called credit tranching. The subordinate or junior tranches will
absorb all of the losses up to their value before senior tranches begin to experience losses.
Subordinate tranches typically have higher yields than senior tranches due to the higher risk
incurred.
Asset-backed and mortgage-backed securities can be quite complicated in terms of their
structures, characteristics, and valuations. Investors have access to these securities through
indexes such as the U.S. ABS index. For those who want to invest in ABS or MBS directly, it's
imperative to conduct a thorough amount of research and weigh your risk tolerance prior to
making any investments.

Asset-Backed Securities (ABS) and Mortgage-Backed Securities (MBS)

Asset-backed securities (ABS) and mortgage-backed securities (MBS) are two of the most
important types of asset classes within the fixed-income sector. MBS are created from
the pooling of mortgages that are sold to interested investors, whereas ABS is created from the
pooling of non-mortgage assets. These securities are usually backed by credit card receivables,
home equity loans, student loans, and auto loans. The ABS market was developed in the 1980s
and has become increasingly important to the U.S. debt market. 1  Despite their apparent
similarities, the two types of assets possess key differences.
The structure of these types of securities is based on three parties: the seller, the issuer, and the
investor. Sellers are the companies that generate loans for sale to issuers and act as the servicer,
collecting principal, and interest payments from borrowers. ABS and MBS benefit sellers
because they can be removed from the balance sheet, allowing sellers to acquire additional
funding.
Issuers buy loans from sellers and pool them together to release ABS or MBS to investors and
can be a third-party company or special-purpose vehicle (SPV). Investors of ABS and MBS are
typically institutional investors that use ABS and MBS in an attempt to obtain higher yields
than government bonds and provide diversification.
 Asset-backed securities (ABS) are created by pooling together non-mortgage assets,
such as student loans. Mortgage-backed securities (MBS) are formed by pooling
together mortgages. 
 ABS and MBS benefit sellers because they can be removed from the balance sheet,
allowing sellers to acquire additional funding.
 Both ABS and MBS have prepayment risks, though these are especially pronounced for
MBS. 
 ABS also have credit risk, where they use senior-subordinate structures (called credit
tranching) to deal with the risk.
 Valuing ABS and MBS can be done with various methods, including zero-volatility and
option-adjusted spreads. 
Foreign Bond
A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic
market's currency as a means of raising capital. For foreign firms doing a large amount of
business in the domestic market, issuing foreign bonds, such as bulldog bonds, Matilda bonds,
and samurai bonds, is a common practice.
 A foreign bond is issued by an international company in a country different from their
own and using that country's currency to denominate those bonds.
 Domestic investors can diversify internationally by owning foreign bonds, and since
they are traded on local exchanges are easier to acquire.
 Still, foreign bonds have certain implicit and explicit risks associated with them,
including the impact of two interest rates, currency exchange rates, and geopolitical
factors.
Foreign Bonds and Their features
Since investors in foreign bonds are usually the residents of the domestic country, investors find
these bonds attractive because they can diversify and add foreign content to their portfolios
without the added exchange rate exposure. Nevertheless, there are still some unique risks of
owning foreign bonds.
Because investing in foreign bonds involves multiple risks, foreign bonds typically have higher
yields than domestic bonds. Foreign bonds carry interest rate risk. When interest rates rise, the
market price or resale value of a bond falls. For example, say an investor owns a 10-year bond
paying 4% and interest rates increase to 5%. Few investors want to take on the bond without a
price cut for offsetting the difference in income.
Foreign bonds also face inflation risk. Buying a bond at a set interest rate means the real value
of the bond is determined by the amount of inflation taken away from the yield. If an investor
purchases a bond with a 5% interest rate during a time when inflation is 2%, the investor’s real
payout is the net difference of 3%.
Currency risk is still an implicit issue for foreign bonds. When income from a bond yielding
7% in a European currency is turned into dollars, the exchange rate may, for example, decrease
the yield to 2% because of exchange rate differences. Note, however, that this risk is not explicit
in the sense that these bonds would always be priced in dollars.
For political risk, investors should consider whether the government issuing the bond is stable,
what laws surround the bond’s issuance, how the court system works, and additional factors
before investing. Foreign bonds face repayment risk. The country issuing the bond may not
have enough money to cover the debt. Investors may lose some or all of their principal and
interest.
International Bond
An international bond is a debt obligation that is issued in a country by a non-domestic entity.
Generally, it is denominated in the currency of its issuer's native country. Like other bonds, it
pays interest at specific intervals and pays its principal amount back to bondholder at maturity.
International bonds are generally corporate bonds. Many mutual funds in the United States hold
these bonds.
 An international bond is a debt obligation that is issued in a country by a non-domestic
entity in its native currency.
 International bonds are usually corporate bonds.
 International bonds can offer portfolio diversification but are highly subject to currency
risk.
Understanding an International Bond
As the business world becomes more globalized, companies now have ways to access cheaper
sources of funds and financing outside of their country of operations. Instead of relying on
investors in their own domestic markets, businesses and governments can tap into the pockets of
global investors for much-needed capital. One way through which companies can access the
international lending scene is by issuing international bonds.
An international bond is issued in a country and currency that is not domestic to the investor.
From the perspective of a domestic investor and resident of the United States, an international
bond is one that is issued by corporations or governments in other countries denominated in a
currency other than the U.S. dollar. These bonds are issued outside of the United States and are
generally backed by the currency of the native country.