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TABLE OF CONTENT
A. INTRODUCTION 1
I. OVERVIEW OF BOND 2
1. Definition 2
2. Features of bond 2
2.1. Par value/ Face Value/ Principal 2
2.2. Coupon 2
2.3. Maturity date 2
2.4. Bond pricing 3
2.5. Credit rating 4
2.6. Callability 7
2.7. Putability 7
3. How are bonds different from stocks? 7
II. INSTITUTION ISSUING BONDS 8
1. Government bonds 8
2. Municipal bonds 9
3. Corporate bonds 9
3.1. Definition 9
3.2. Advantages of bond financing over a bank loan 9
3.2.1. Fixed Interest Rate 9
3.2.2. Long-term Loan, Fully Amortized 10
3.2.3. Open-ended Mortgage 10
3.2.4. Liberal Prepayment Provisions 10
3.3. Type of corporate bond 11
3.3.1. Secured bond 11
3.3.2. Unsecured bond (debenture) 11
3.3.3.Convertible bond 11
3.3.4. Junk bond 12
3.3.5. Zero coupon bond 12
3.4. Requirements 12
III. RISK OF INVESTING IN BONDS 13
1. Interest Rate Risk 13
2. Inflation Risk 13
3. Default Risk 14
4. Rating Downgrades 14
5. Liquidity Risk 14
IV. WHY BUYING BOND? 15
1. Income predictability 15
2. Safety 15
3. Choice 15
B. CONCLUSION: 15
C. REFERENCES 16
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A. Introduction
Nowadays, in whatever economic types, the capital always plays an extremely important role. It is not only important in day-by-day needs but also in many aspects of the real life.
With business organizations, they need capital to buy or lease real estate for placing the factory, the office, the inventory goods…; to purchase materials for producing merchandise; to distribute the merchandise from producers to consumers, to pay for employees, etc. So how they can obtain the needed capital for their business? There are many ways to raise capital such as: mortgage assets, borrowing from the financial institutions or banks, issuing stocks or bonds, etc.
With government, they need capital to do the government projects, to do profit or non-profit activities, etc. So how they can do it? Increasing any types of taxes? Increasing the price of products which are under the management of the government? Borrowing from other countries? Selling the real materials abroad with the low price? Issuing stocks or bonds? etc.
With many people who have free-cash and want to use it usefully without doing business, how they can do with their money? Lending? Saving in banks? Buying stocks or bonds? etc.
They have many ways to choose. They can find the best way which is suitable for their own situation. However, there are many organizations choose issuing bonds, and many people choose buying bonds instead of stocks. Why they choose this way? How they can do it? What are the bonds?
Today, we will introduce about BONDS, a way to raise capital for business organization, for government and to invest carefully for the investors.
I. Overview of bond
Definition
Bond is a debt instrument issued for a period of time with the purpose of raising capital by borrowing. The issuer is the borrower (debtor), the holder is the lender (creditor).
Institutions that sell bond are governments, cities, corporations.
Coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains) are the three factors affecting the yield of bond.
Features of bond
Par value/ Face Value/ Principal
The face value (also known as the par value or principal) is the amount of money printed on the bond, on which the issuer pays interest and the holder will get back when bond matures.
2.2. Coupon
The interest rate printed on bond expressed as a percentage of the par. It can be paid monthly, quarterly, semi-annually or annually. The risk and the maturity date will affect the coupon. The more risk the bond is and the longer the maturity date the bond has, the higher interest rate is.
Maturity date
The date when bond comes due and the issuer has to repay principal to the holders.
Municipal bonds issued in 2005 in Ho Chi Minh city
2.4. Bond pricing
The real price that investor pay for the bond. It can be higher, equal or lower than the nominal value. However, whatever the buying price is, the coupon is still determined by nominal value and the issuer still pay the principal when bond matures.
The buying price of bond is opposite with interest rate on the secondary market. When interest rate increases, the bond price will decrease and when interest rate decreases, bond price will go up.
Example: a company issues a bond with par value $1000, coupon 8%. After a period of time:
Case 1: Interest rate on secondary market is 10%. New bond (a bond with similar characteristics such as credit quality and maturity) coupon is 10%
Instead of holding old bond, investors will use their money to buy new bond. Therefore, they will sell old bond at price lower than its nominal value to make it competitive. The 8% bond’s interest payments would have a current yield of 10 % only if that bond could be bought for $800. Now, the price falls from $1000 to $800 (-20%). The bond is said to be selling at a discount
Case 2: Interest rate on secondary market is 6%. New bond coupon is 6%
Instead of buying new bond, investors will keep old bond. Therefore, the price of old bond in the secondary market will increase. The 8% bond’s interest payments would have a current yield of 6% only if that bond could be bought for $1333. Now the price goes up from $1000 to $1333 (+30%). The bond is said to be selling at a premium.
2.5. Credit rating
A credit rating evaluates the credit worthiness of a corporation, or a country. Therefore, a credit rating let a lender or investor know whether the issuer can pay back a loan. If the issuers have a poor credit rating, they also have a high risk of default or bankrupt, that leads to high interest rates, or the refusal of a loan by the creditor. The evaluation is necessary for the investors will be protected.
When a corporation sells a new bond issue to investors, it usually subscribes to several bond rating agencies for a credit evaluation of the bond issue. Each contracted rating agency then provides a credit rating - an assessment of the credit quality of the bond issue based on the issuer's financial condition. Rating agencies will normally provide a credit rating only if it is requested by an issuer and will charge a fee for this service. As part of the contractual arrangement between the bond issuer and the rating agency, the issuer agrees to allow a continuing review of its credit rating even if the rating deteriorates. Without a credit rating a new bond issue would be very difficult to sell to the public, which is why almost all bond issues originally sold to the general public have a credit rating assigned at the time of issuance. Also, most public bond issues have ratings assigned by several rating agencies.
Some rating agencies in the United States are Duff and Phelps, Inc. (D&P), Fitch Investors Service (Fitch), McCarthy, Crisanti and Maffei (MCM), Moody's Investors Service (Moody's), and Standard and Poor's Corporation (S&P). Moody's and Standard and Poor's is considered the two best rating companies. These companies publish regularly updated credit ratings for thousands of domestic and international bond issues.
Rating agency
Credit Rating Description
Moody’s
Duff &
Phelps
Standard
& Poor’s
Investment Grade Bond Ratings
Aaa
Aa1
1
2
AAA
AA+
Highest credit rating, maximum safety.
Aa2
Aa3
A1
3
4
5
AA
AA-
A+
High credit quality, investment-grade bonds.
A2
A3
Baa1
6
7
8
A
A-
BBB+
Upper-medium quality, investment-grade bonds.
Baa2
Baa3
9
10
BBB
BBB-
Lower-medium quality, investment-grade bonds.
Speculative Grade Bond Ratings
Ba1
Ba2
Ba3
11
12
13
BB+
BB
BB-
Low credit quality, speculative-grade bonds.
B1
B2
B3
14
15
16
B+
B
B-
Very low credit quality, speculative-grade bonds.
Extremely Speculative Grade Bond Ratings.
Caa
17
CCC+
CCC
CCC-
Extremely low credit standing, high-risk bonds.
Ca
C
CC
C
D
Extremely speculative
Bonds in default.
(Source: Fundamentals of Investments, Charles J. Corrado, Chapter 11, page 33)
2.6. Callability
The characteristic of a bond gives the issuer the right to take back or redeem bonds before they mature under certain conditions. The sooner the bond is called, the higher is the price which issuer has to pay to the bond holders. The issuers use this right to make sure that they don’t pay the higher interest on the debt in case the interest on the market is lower than interest of the bond. When they redeem all the bonds, they will reissue them at a lower interest rate than that of the previous bonds.
2.7. Putability
The characteristic of bond gives the holder the right to sell the bonds to the issuer before they mature under certain condition. When the interest rate in the market increase (causing bond value to decrease), the bond holder can sell bonds back to the issuer to recover the loss.
How are bonds different from stocks?
Bonds are considered debt investments, the bond holder become the creditor of the company. On the contrary, a stock is considered an equity investment because the investor (stockholder) becomes a part owner of the corporation.
The bond holders don’t have the right to participate in corporation’s operations because they are just creditors. Whereas the stockholder may have the right in voting in the company.
The issuer of bond is government, corporation or city. However, only corporations issue stock.
Bond holders earn fixed income from interest of the bonds. On the other hand, stockholder receive dividend - a proportion on the corporation’s profits and it’s not fixed
Bonds have maturity date but stocks don’t.
Because bondholders are creditors rather than part owners, if a corporation goes bankrupt, bondholders have a higher claim on assets than stockholders. This makes bond investor safer.
II. Institution issuing bonds
Government bonds
A government bond is a bond issued by a national government denominated...
Download Đề tài Tổng quan về trái phiếu miễn phí
TABLE OF CONTENT
A. INTRODUCTION 1
I. OVERVIEW OF BOND 2
1. Definition 2
2. Features of bond 2
2.1. Par value/ Face Value/ Principal 2
2.2. Coupon 2
2.3. Maturity date 2
2.4. Bond pricing 3
2.5. Credit rating 4
2.6. Callability 7
2.7. Putability 7
3. How are bonds different from stocks? 7
II. INSTITUTION ISSUING BONDS 8
1. Government bonds 8
2. Municipal bonds 9
3. Corporate bonds 9
3.1. Definition 9
3.2. Advantages of bond financing over a bank loan 9
3.2.1. Fixed Interest Rate 9
3.2.2. Long-term Loan, Fully Amortized 10
3.2.3. Open-ended Mortgage 10
3.2.4. Liberal Prepayment Provisions 10
3.3. Type of corporate bond 11
3.3.1. Secured bond 11
3.3.2. Unsecured bond (debenture) 11
3.3.3.Convertible bond 11
3.3.4. Junk bond 12
3.3.5. Zero coupon bond 12
3.4. Requirements 12
III. RISK OF INVESTING IN BONDS 13
1. Interest Rate Risk 13
2. Inflation Risk 13
3. Default Risk 14
4. Rating Downgrades 14
5. Liquidity Risk 14
IV. WHY BUYING BOND? 15
1. Income predictability 15
2. Safety 15
3. Choice 15
B. CONCLUSION: 15
C. REFERENCES 16
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Tóm tắt nội dung:
TABLE OF CONTENTA. Introduction
Nowadays, in whatever economic types, the capital always plays an extremely important role. It is not only important in day-by-day needs but also in many aspects of the real life.
With business organizations, they need capital to buy or lease real estate for placing the factory, the office, the inventory goods…; to purchase materials for producing merchandise; to distribute the merchandise from producers to consumers, to pay for employees, etc. So how they can obtain the needed capital for their business? There are many ways to raise capital such as: mortgage assets, borrowing from the financial institutions or banks, issuing stocks or bonds, etc.
With government, they need capital to do the government projects, to do profit or non-profit activities, etc. So how they can do it? Increasing any types of taxes? Increasing the price of products which are under the management of the government? Borrowing from other countries? Selling the real materials abroad with the low price? Issuing stocks or bonds? etc.
With many people who have free-cash and want to use it usefully without doing business, how they can do with their money? Lending? Saving in banks? Buying stocks or bonds? etc.
They have many ways to choose. They can find the best way which is suitable for their own situation. However, there are many organizations choose issuing bonds, and many people choose buying bonds instead of stocks. Why they choose this way? How they can do it? What are the bonds?
Today, we will introduce about BONDS, a way to raise capital for business organization, for government and to invest carefully for the investors.
I. Overview of bond
Definition
Bond is a debt instrument issued for a period of time with the purpose of raising capital by borrowing. The issuer is the borrower (debtor), the holder is the lender (creditor).
Institutions that sell bond are governments, cities, corporations.
Coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains) are the three factors affecting the yield of bond.
Features of bond
Par value/ Face Value/ Principal
The face value (also known as the par value or principal) is the amount of money printed on the bond, on which the issuer pays interest and the holder will get back when bond matures.
2.2. Coupon
The interest rate printed on bond expressed as a percentage of the par. It can be paid monthly, quarterly, semi-annually or annually. The risk and the maturity date will affect the coupon. The more risk the bond is and the longer the maturity date the bond has, the higher interest rate is.
Maturity date
The date when bond comes due and the issuer has to repay principal to the holders.
Municipal bonds issued in 2005 in Ho Chi Minh city
2.4. Bond pricing
The real price that investor pay for the bond. It can be higher, equal or lower than the nominal value. However, whatever the buying price is, the coupon is still determined by nominal value and the issuer still pay the principal when bond matures.
The buying price of bond is opposite with interest rate on the secondary market. When interest rate increases, the bond price will decrease and when interest rate decreases, bond price will go up.
Example: a company issues a bond with par value $1000, coupon 8%. After a period of time:
Case 1: Interest rate on secondary market is 10%. New bond (a bond with similar characteristics such as credit quality and maturity) coupon is 10%
Instead of holding old bond, investors will use their money to buy new bond. Therefore, they will sell old bond at price lower than its nominal value to make it competitive. The 8% bond’s interest payments would have a current yield of 10 % only if that bond could be bought for $800. Now, the price falls from $1000 to $800 (-20%). The bond is said to be selling at a discount
Case 2: Interest rate on secondary market is 6%. New bond coupon is 6%
Instead of buying new bond, investors will keep old bond. Therefore, the price of old bond in the secondary market will increase. The 8% bond’s interest payments would have a current yield of 6% only if that bond could be bought for $1333. Now the price goes up from $1000 to $1333 (+30%). The bond is said to be selling at a premium.
2.5. Credit rating
A credit rating evaluates the credit worthiness of a corporation, or a country. Therefore, a credit rating let a lender or investor know whether the issuer can pay back a loan. If the issuers have a poor credit rating, they also have a high risk of default or bankrupt, that leads to high interest rates, or the refusal of a loan by the creditor. The evaluation is necessary for the investors will be protected.
When a corporation sells a new bond issue to investors, it usually subscribes to several bond rating agencies for a credit evaluation of the bond issue. Each contracted rating agency then provides a credit rating - an assessment of the credit quality of the bond issue based on the issuer's financial condition. Rating agencies will normally provide a credit rating only if it is requested by an issuer and will charge a fee for this service. As part of the contractual arrangement between the bond issuer and the rating agency, the issuer agrees to allow a continuing review of its credit rating even if the rating deteriorates. Without a credit rating a new bond issue would be very difficult to sell to the public, which is why almost all bond issues originally sold to the general public have a credit rating assigned at the time of issuance. Also, most public bond issues have ratings assigned by several rating agencies.
Some rating agencies in the United States are Duff and Phelps, Inc. (D&P), Fitch Investors Service (Fitch), McCarthy, Crisanti and Maffei (MCM), Moody's Investors Service (Moody's), and Standard and Poor's Corporation (S&P). Moody's and Standard and Poor's is considered the two best rating companies. These companies publish regularly updated credit ratings for thousands of domestic and international bond issues.
Rating agency
Credit Rating Description
Moody’s
Duff &
Phelps
Standard
& Poor’s
Investment Grade Bond Ratings
Aaa
Aa1
1
2
AAA
AA+
Highest credit rating, maximum safety.
Aa2
Aa3
A1
3
4
5
AA
AA-
A+
High credit quality, investment-grade bonds.
A2
A3
Baa1
6
7
8
A
A-
BBB+
Upper-medium quality, investment-grade bonds.
Baa2
Baa3
9
10
BBB
BBB-
Lower-medium quality, investment-grade bonds.
Speculative Grade Bond Ratings
Ba1
Ba2
Ba3
11
12
13
BB+
BB
BB-
Low credit quality, speculative-grade bonds.
B1
B2
B3
14
15
16
B+
B
B-
Very low credit quality, speculative-grade bonds.
Extremely Speculative Grade Bond Ratings.
Caa
17
CCC+
CCC
CCC-
Extremely low credit standing, high-risk bonds.
Ca
C
CC
C
D
Extremely speculative
Bonds in default.
(Source: Fundamentals of Investments, Charles J. Corrado, Chapter 11, page 33)
2.6. Callability
The characteristic of a bond gives the issuer the right to take back or redeem bonds before they mature under certain conditions. The sooner the bond is called, the higher is the price which issuer has to pay to the bond holders. The issuers use this right to make sure that they don’t pay the higher interest on the debt in case the interest on the market is lower than interest of the bond. When they redeem all the bonds, they will reissue them at a lower interest rate than that of the previous bonds.
2.7. Putability
The characteristic of bond gives the holder the right to sell the bonds to the issuer before they mature under certain condition. When the interest rate in the market increase (causing bond value to decrease), the bond holder can sell bonds back to the issuer to recover the loss.
How are bonds different from stocks?
Bonds are considered debt investments, the bond holder become the creditor of the company. On the contrary, a stock is considered an equity investment because the investor (stockholder) becomes a part owner of the corporation.
The bond holders don’t have the right to participate in corporation’s operations because they are just creditors. Whereas the stockholder may have the right in voting in the company.
The issuer of bond is government, corporation or city. However, only corporations issue stock.
Bond holders earn fixed income from interest of the bonds. On the other hand, stockholder receive dividend - a proportion on the corporation’s profits and it’s not fixed
Bonds have maturity date but stocks don’t.
Because bondholders are creditors rather than part owners, if a corporation goes bankrupt, bondholders have a higher claim on assets than stockholders. This makes bond investor safer.
II. Institution issuing bonds
Government bonds
A government bond is a bond issued by a national government denominated...