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FINN11B - 05. Bond Markets

The bond market consists of long-term debt instruments issued by corporations and governments to raise funds for operations, with investors receiving interest and the promise of repayment at maturity. Key types of bonds include Treasury notes and bonds, which are issued by the government, and corporate bonds, which are issued by companies. Various bond types exist, such as bearer bonds, registered bonds, and convertible bonds, each with distinct features and repayment terms.

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Adelaide Demain
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8 views11 pages

FINN11B - 05. Bond Markets

The bond market consists of long-term debt instruments issued by corporations and governments to raise funds for operations, with investors receiving interest and the promise of repayment at maturity. Key types of bonds include Treasury notes and bonds, which are issued by the government, and corporate bonds, which are issued by companies. Various bond types exist, such as bearer bonds, registered bonds, and convertible bonds, each with distinct features and repayment terms.

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Adelaide Demain
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© © All Rights Reserved
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BOND MARKETS

OVERVIEW OF THE BOND


MARKET
DEFINITION OF BOND
MARKETS
▪ Equity (stocks) and debt (notes, bonds, and mortgages) instruments with maturities of more
than one year trade in capital markets.
▪ Bonds are long term debt obligations issued by corporations and government units.
▪ Proceeds from a bond issue are used to raise funds to support long-term operations of the
issuer. In return for the investor’s funds, bond issuers promise to pay a specified amount in the
future on the maturity of the bond (face value) plus coupon interest on the borrowed funds. If
the terms of the repayment are not met by the bond issuer, the bond holder (investor) has a
claim on the assets of the bond issuer.
▪ Bond markets are markets in which bonds are issued and traded.
▪ Two types of bond markets: (1) Treasury notes and bonds and (2) corporate bonds.
BOND MARKET SECURITIES
TREASURY NOTES AND
BONDS
▪ Treasury Notes and Bonds (T-Notes and T-Bonds) are long-term securities issued by the
Philippine treasury to finance the national debt and other government expenditures.
▪ Like T-bill, once issued T-notes and T-bonds trade in very active secondary markets.
▪ Typically, T-Notes and T-Bonds pay interest semiannually.
TREASURY NOTES AND
BONDS
▪ When an investor buys a T-Note or T-Bond between coupon payments, the buyer must
compensate the seller for that portion of the coupon payment accrued between the last coupon
payment and the settlement day, while the seller was still the owner of the security.
▪ Accrued Interest – The portion of the coupon payment accrued between the last coupon
payment and the settlement day.

i
TREASURY NOTES AND
BONDS
Calculation of Accrued Interest
The coupon rate on the T-Note is 5.875% and the current price quoted on the bond is 101.34375
of the face value of the T-Note. The last coupon payment occurred 83 days before settlement,
and the next coupon payments will be paid 101 days from settlement.
1. Compute the accrued interest due to the seller from the buyer at settlement.
[(0.05875/2) X (83 days/184days)] X 101.34375
= [0.029375 X 0.45108]
=0.005977 X 101.34375
=0.60573
1. Compute the dirty price (or the full price paid) of the buyer in this transaction.
2. 101.34375+0.60573 =101.94948
CORPORATE BONDS
▪ Corporate bonds are long-term bonds issued by corporation
▪ The minimum denomination on publicly traded corporate bonds is P50,000, and
coupon-paying corporate bonds generally pay interest semiannually.
▪ Bond indenture is the legal contract that specified the rights and obligations of the bond issuer
and the bond holders.
▪ Bond indenture contains a number of covenants associated with the bond issuer and bond
holders. These covenants include such rights for the bond issuer as the ability to call the bond
issue and restrictions as to limits on the ability of the issuer to increase dividends paid to equity
holders.
▪ By legally documenting the rights and obligations of all parties involved in a bond issue, the
bond indenture helps lower the risk (and therefore the interest cost) of the bond issue.
KINDS OF BONDS
▪ Bearer Bonds – Bonds with coupons attached to the bond. The holder presents the coupons to
the issuer for the payments of interest when they come due.
▪ Registered Bond – A bond in which the owner is recorded by the issuer and the coupon
payments are mailed to the registered owner.
▪ Term Bonds – Bonds in which the entire issue matures on a single date.
▪ Serial Bonds – Bonds that mature on a series of dates, with a portion of the issue paid off on
each.
▪ Mortgage Bonds – Bonds issued to finance specific projects, which are pledged as collateral
for the bond issue.
▪ Debentures – Bonds backed solely by the general credit worthiness of the issuing firm,
unsecured by specific assets and collateral.
KINDS OF BONDS
▪ Subordinated Debentures – Bonds that are unsecured and are junior in their rights to
mortgage bonds and regular debentures.
▪ Convertible Bonds – Bonds that may be exchanged for another security of the issuing firm at
the discretion of the bond holder.
▪ Stock Warrants – Bonds issued with stock warrants attached giving the bond holder an
opportunity to purchase common stock at a specified price up to a specified date.
▪ Callable Bonds – Bonds that allow the issuer to force the bond holder to sell the bond back to
the issuer at a price above the par value (at a call price)
▪ Call Provision – A provision on a bond issue that allows the issuer to force the bond holder to sell the
bond back to the issuer at a price above the par value (call price)
▪ Call Premium – The difference between the call price and the face value on the bond
KINDS OF BONDS
▪ Sinking Fund Provision – A requirement that the issuer retire a certain amount of the bond
issue each year.

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