Practice investment management pim3 ch04 bond fundamentals

CHAPTER FOUR

BOND FUNDAMENTALS
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Practical Investment Management
Robert A. Strong


Outline
 Bond Principles
 Identification of Bonds
 Classification of Bonds
• Issuer
• Security
• Term
 Terms of Repayment
• Interest Only
• Sinking Fund
• Balloon Loan
• Income Bond

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Outline
 Bond Principles … continued
 Bond Cash Flows
• Annuities
• Zero Coupon
• Variable Rate
• Consols
• Inflation-Indexed Treasury Bonds
 Convertible and Exchangeable Bonds
 Registration
• Bearer Bonds
• Registered Bonds
• Book Entry Bonds
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Outline
 The Financial Page Listing
 Basic Information
 Footnotes
 Government Bonds

 Bond Pricing and Returns
 Valuation Equations
• Annuities
• Zero Coupon Bonds
• Variable Rate Bonds
• Consols

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Outline
 Bond Pricing and Returns … continued
 Yield to Maturity
• Calculating the Yield to Maturity
• Misreading the Yield to Maturity
• The Yield Curve
 Spot Rates
 Realized Compound Yield
 Current Yield
 Accrued Interest

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Outline
 Bond Risks
 Price Risks
• Default Risk
• Interest Rate Risk
 Convenience Risks
• Call Risk
• Reinvestment Rate Risk

• Marketability Risk

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Bond Principles: Identification of Bonds
 Bonds are identified by issuer, coupon
rate, and maturity.
 The face value of a bond is called its par
value.
 e.g. 5 of “Hertz sevens of 03” (Hertz 7s03)
 A legal document called the indenture
contains the details of the bond issue.

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Bond Principles: Classification of Bonds
Method 1: By issuer
a. government e.g. US Treasury, federal agency,
state, local
b. corporation e.g. industrial, utility, financial,
transportation
c. others e.g. foreign government, foreign
corporation, World Bank
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Bond Principles: Classification of Bonds

Insert Table 4-1 here.

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Bond Principles: Classification of Bonds
Method 2: By security
a. unsecured debt - backed by faith in the taxing
power of the government, or the good name of
the company (debenture)
b. secured debt e.g. revenue bond, assessment
bond, mortgage, collateral trust bond,
equipment trust certificate
Bond security sometimes comes from non-traditional
sources. Recently, some rock stars floated bonds
using their future earnings as backing.
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South-Western / Thomson Learning © 2004

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