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The Analysis and Valuation of Bonds
Basic features of bonds that affect their risk, return and value?  | The global bond market is large and diverse and represents an important investment opportunity. This is concerned with long-term, nonconvertable debt obligations of public and private issues in the united states and major global markets. We also consider preferred stock and convertible bonds. United states and foreign bonds increase the universe of investments available for the creation of a diversified portfolio. Public bonds are long-term, fixed-obligation debt securities packaged in convenient, affordable denominations for sale to individuals and financial institutions. they differs from other debt, such as individual mortgages and privately placed debt obligations, because they are sold to the public rather then channeled directly to a single leader. Bond issues are considered fixed income securities because they impose fixed financial obligations on the issuers. Specially, the issuer agrees to: 1. Pay a fixed amount of interest periodically to the holder of record. 2. Repay a fixed amount of principle at the date of maturity. Normally, interest on bonds is paid every six months, although some bond issues pay in intervals as short as a month or as long as a year. The principal is due at maturity; this per value of the issue is rarely less than &1000. A bond has a specified term to maturity, which defines the life of the issue. The public debt market typically is divided into three time segment based on an issue's original maturity. 1. Short -term issues with maturities of one year or less is known money market. 2. Intermediate term issues with maturities in excess of 1 year but less then 10 years is known as notes. 3. Long-term obligations with maturities in excess of 10 years, called bonds. Bond Characteristics The coupon, maturity, principle value and the type of ownership are important intrinsic features of a bond. The coupon of a bond indicates of the income that the bond investor will receive over the life of the issue. This is known as interest income, coupon income or nominal yield. The term to maturity specifies the date or the number of the years before a bond matures. There are two different types of maturity. the most common is term bond, which has a single maturity date. Alternatively a serial obligation bond issue has a series of maturity dates, perhaps 20 or 25. The principal or par value of an issue represent the original value of the obligation. Bonds Differ in terms of ownership. With bearer bond the holder or bearer is the owner so the issuer keeps no record of ownership. interest from a bearer bond is obtained by clipping coupons attached to the bonds and sending them to the issuer for payment. Rates of return on bonds: The rate of return on a bond is computed in the same way as the rate of return on stock or any asset. It is determined by the beginning and ending price and the cash flows during the holding period. The major difference between stocks and bonds is that the interim cash flow on bonds is contractual and accrues over time as discussed subsequently whereas the dividends on stock may vary. The global bond market structure: The market for fixed income securities is substantially larger than the listed equity exchanges because corporations tend to issue bonds rather than common stock. The size of the global bond market and the distribution among countries can be gleaned from which lists the dollar value of debt outstanding and the percentage distribution for the major bond markets. We have described the basic features available for all bonds and the overall structure of the global bond market in terms of the issuers of bonds and investors in the bond. In this section we provide a detailed discussion of the bonds available for the major issuers of bonds. The p[presentation is longer then you would expect because when we discuss each issuing unit, such as governments, municipalities or corporations we briefly consider the bonds available on several of the major world financial centers such as Japan, Germany, United States and United Kingdom. Domestic Government Bonds United States: The United States government backed by the full faith and credit of the U.S. Treasury, issues treasury bills which mature in less then one year and two forms of long term obligations. Short term notes and bonds because they are sold as a discount form par to provide the desired yield. The return is the difference between the purchase price and the par at maturity. Government notes and bonds carry semiannual coupons that specify the nominal yield of the obligations. Japan: The second largest government bond market in the world is Japan's. It is controlled by the Japanese government and the bank of japan. Japanese government bonds are an attractive investment vehicle for these favoring the Japanese yen because their quality is equal to that of U.S. Treasury securities and they are very liquid. Germany: The third latest bond market in the world is the German Market, although the government segment of this market is relatively small. Approximately 40% of domestic stretchmarks bonds are issued by the non bank corporations, whereas the federal government issues about 36% through the German central Bank. Bonds issues by the Federal Republic of Germany, referred to as bond bonds, are issued in amounts up to DM 4 billion with a minimum demonstration of DM 100. United Kingdom: The United Bond market is made up to of jobbers and brokers who act as principles or agents with negotiated commission structures. in addition there are 27 primary dealers similar to the U.S. Treasury market. Municipal Bonds: Municipal bonds are issued by states, countries, cities and other political subdivisions. Again the size of the Municipal bond market varies substantially among countries. It is about 10% of the total U.S. market compared to about 3% in Japan, 15% in Germany and nonexistent in the united kingdom. Because of the size and popularity of this market in the United States, we will discuss only the U.S. municipal in bond market. Municipal Bond Insurance: A significance feature of the U.S. Municipal Bond market is Municipal Bond Insurance, which provides that an insurance company will grantee to make principal and interest payments in the event that the bonds features. the insurance is placed on the bond at date of issue and is irrevocable over the life of the issue. The issuer purchase the insurance for the benefit of the investor, and the municipally benefits from lower interest costs due to lower default risk, which causes an increase in the rating on the bond and increased marketability. United States Corporate Bond Market: Utilities dominates the U.S. corporate bond market. Other important segment include industrial, rail and transportation issues and financial issues these market is very diverse and includes debentures, first mortgage issues, convertible obligations, bonds with warrants, sub-ordinates debentures, income bonds, collateral tarts bonds bracket by financial assets, equipment tarts certificates and asset backed securities including mortgage backbones. Mortgage Bonds: The issue of a mortgage bonds has granted to the bond holder. A first mortgage line on some piece of properties or possibly all the firms property. Such a line provides grater security of a bond holder and a lower interest rate for the issuing firm. Zero coupon and deep discount bonds: The typical corporate bond has a coupon and maturate. in tern, the value of the bond is present value of the stream of the cash flows discounted at the require yield to maturity. Alternatively, some bonds do not have any6 coupon or any coupons that are below the market rate at the time of issue. Such securities are referred to as zero coupon or mini coupons bond or original issue discount bonds. A zero coupon discount bond promises to pay a stipulated principle amount at a future maturity date, but it doesn't promise to make any interim interest payments. International Bonds: United States: The euro bond market has been much larger then Yankee bond market. However, because the Eurodollar bond market is heavily affected by changes in the U.S. Dollar, it has experienced slower growth during periods when the dollar was weak. Such periods have created a desire for diversification by investors. Yankee bonds are issued by foreign firms who register with the SEC borrow U.S. dollars, using issues under writer by a U.S. indicate for delivery in the united states. These bonds are traded in the United states and pay interests semi-annually. Over 60% of Yankee bonds are issued by Canadian corporation and typically have shorter maturities and longer all protection then U.S. domestic Issues. |
