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Bonds and Treasuries
A note whereby the investor loans a corporation or government money at a set interest rate over a predetermined time period.
1,619 Questions
The FSA has warned of the risks associated with increasing retail access to the bond markets.
In a speech about the regulatory challenges and developments in the bond markets at the Euromoney bond investors congress in London, FSA managing director of risk Sally Dewar commented on the launch of the London Stock Exchange's new electronic order book trading platform for corporate and UK government bonds in response to investor demand.
She said: "While we see this as a positive development, with the potential to bring benefits to both firms and consumers, there are also risks associated with increasing retail access. For example, authorised firms will need to fully explain to their retail clients the potential risks associated with buying corporate bonds."
So what are the risks?
- Default Risk. The risk of the bond's issuer not meeting the schedule of cash flows on a full and timely basis.
- Credit Spread Risk. The risk that the credit spread of a bond (extra yield to compensate investors for taking default risk), which is inherent in the fixed coupon, becomes insufficient compensation for default risk that has later deteriorated. As the coupon is fixed the only way the credit spread can readjust to new circumstances is by the market price of the bond falling and the yield rising to such a level that an appropriate credit spread is offered.
- Interest Rate Risk. The level of Yields generally in a bond market, as expressed by Government Bond Yields, may change and thus bring about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate levels.
- Liquidity Risk. There may not be a continuous secondary market for a bond, thus leaving an investor with difficulty in selling at, or even near to, a fair price.
- Supply Risk. Heavy issuance of new bonds similar to the one held may depress their prices.
- Inflation Risk. Inflation reduces the real value of future fixed cash flows. An anticipation of inflation, or higher inflation, may depress prices immediately.
- Tax Change Risk. Unanticipated changes in taxation may adversely impact the value of a bond to investors and consequently its immediate market value.
http://www.davidandgoliathworld.com/2010/02/what-are-the-risks-in-bonds/
Easy Exit Bonds are bonds which provides liquidity and easy exit route to the investor by way of redemption where investors can get ready encashment in case of need to withdraw before maturity.
What is a difference between GILT And government Securities?
'Gilts' or 'Gilt-Edged' is a colloquialism used in the United Kingdom to describe government securities issued in that country. South Africa and India use the same term in those countries for reasons of colonial legacy.
Terms used in other countries include 'OAT's' in France, 'Bunds' in Germany and 'Treasuries' in the USA, all of these terms being subsets of the generic term 'Government Securities'
for more see: www.davidandgoliathworld.com
What does it mean when a bond is traded for 104.25?
Bonds trade on prices that are a percentage of face value and these are called 'Clean Prices'. So 104.25 means that the $10,000 face amount purchased will cost the investor $10,425 + Accrued Interest. If the bond last paid it's 4% Semi-Annual coupon exactly 3 months ago on the settlement date the cost will be $10,425 + $100 of Accrued Interest (half of the next 2% coupon having accrued), giving a total cost of $10,525. Example calculations can be found for US Treasuries and other instruments at www.davidandgoliathworld.com. The 'Dirty Price' in the example given would then be 105.25, including the Accrued Interest that is not routinely included in the dealer's 'Clean Price' quotation.
Why does long term bond fluctuate more when interest rates change than do the short term?
longer term bond fluctuates more because in the longer term market conditions changes dramatically....in the long term their face value may eiter increase or decrease due to increase in interest rates.
What are the Recent examples of market development?
Market development is the sale of a product in a new market. For example, Coke selling their product in Russia and Evian putting their bottles in the health section of the grocery store.
What does EE stand for in EE series bond?
It's a alphabetical number system.
From Wikipedia:
The first modern U.S. Savings Bonds were issued in 1935, to replace United States Postal Service Bonds. They were marketed as a safe investment that was accessible to everyone. The first bonds, series A, were followed by series B, C, D, E, EE, F, G, H, HH, and I.
How do interest rates affect investment?
When interest rates are high, investors will consider investing in short term investments, instead of long term investments. When interest rates are low, investors will consider investing in bonds because they are safer.
A noncallable bond is a debenture which the company or institution that issued it cannot force you to redeem before the final call date (i.e. they can't call it). For example, if you purchased a 30-year bond in 2005 with a 4.5% coupon, the issuer today would like to call that bond because they can borrow money more cheaply (i.e. at a lower interest rate). But if the bond is noncallable they cannot do that. The trade-off is that a noncallable bond generally has a slightly lower nominal coupon.
When can savings bonds from 2002 be cashed in?
Depends on the type of bonds. Your savings bond should say whether it's when you reach 18 or if there's a special cash in date stipulation.
What are Treasury Bond Strip Rates?
Treasury Bond STRIPS are zero-coupon bonds STRIPPED from regular coupon paying Treasury Securities.
Zero - Coupon bonds are simply bond instruments that pay no interim cash flows. The
zero coupon bond is the most simple type of transaction involving only two cash flows:
• Money Invested Now (at discount)
• Money Returned at Maturity (face amount)
As bonds have a typical life longer than one year we tend to compare them on the basis of Yield to Maturity. The YTM of a zero coupon bond is a relatively simple concept that we will deal with in the next few paragraphs.
- The annual YTM of a five year zero coupon bond is simply the answer to the following question: What rate of interest would I need to earn on each of a series of successive one year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond?
- On occasion a similar question might be asked with the intention of ascertaining the 'Semi - Annual' YTM of a five year zero coupon bond: What rate of interest would I need to earn on each of a series of successive half - year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond? This half - yearly rate of return is, by market convention, then simply doubled so as to provide a yearly equivalent.
- More detail can be found on this at www.davidandgoliathworld.com
When a bond matures the issuer has to pay the investor the full face value of the bond. The bond will also have a stated interest rate. If an investor will only accept a rate of interest which is higher than the stated interest rate, the issuer will likely sell the bond for less than the present value of the face value of the bond.
For example, If a $100,000 bond is issued with a $4,000 discount to meet the buyers desired return, the issuer will have to pay the investor the $96,000 ($100,000-$96,000) the issuer received plus the $4,000 discount upon maturity.
Since the issuer has to pay out that $4,000, upon maturity, to secure $96,000 the $4,000 discount is recognized by the issuer as interest expense (over the life of the bond).
After cost of debt = 12% x (1-0.35) = 7.8%
$1297
Which of the following is not an advantage of issuing bonds instead of common stock?
Earnings per share on common stock are always lower.
It makes the interest payment process easier - if accrued interest is collected when the bond is sold, then the payment to all bondholders is the same: the interest amount for 3 or 6 months, or whatever the payment period is
What is the differences of certificate of deposit and stocks and bond?
A certificate of deposit (CD) pays a specified rate of interest over a specified period of time and your return is quantifiable from day one. The return on stocks and bonds will vary over time depending on market and economic factors and interest rate changes thus making it impossible to predict exact future returns. The benefit of a CD is that they are usually insured by the Federal Deposit Insurance Corporation and there is no risk of loss. The drawback of a CD is that your return is capped. Stocks and bonds, although subject to market risk, typically deliver returns in excess of a CD.
What is the implication of a high face value and a lower quoted price of a bond?
Bond prices serve as a benchmark for many things, including interest rates, forecasts of future economic activity etc,
High value bonds are sometimes called premium bonds. Premium bonds are attractive for their high coupon rates that are greater than current market yields. In other words, the higher initial cost can be offset by the higher cash payments received throughout the life of the bond.
Here are the implications of Premium Bond (high face value):
- Investment is subject to decrease in value due to inflation
- Chances of winning larger cash prizes are slim
- Savings in interest-earning accounts may earn more than those in Premium Bonds
- No regular interest earned
- No guarantee of win
- Money is not instantly accessible
- Minimum and maximum investment required
However there is no advantage to buying a bond at a discount, or even a , versus one trading at a premium. Like anything in life, you get what you pay for
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Disclaimer: This information does not serve as investment advise and take due diligence when placing a trade.
What is a bond and how interest are paid?
Bond could for instance be if you lend money to the government. They would pay you an interest like if you would pay an interest in the bank.
