INVESTMENTS IN BONDS

Investment and Portfolio Management BAF106

Identification and classification of bonds

Bonds are securities with following basic characteristics: They are typically securities issued by a corporation or governmental body for specified term: bonds become due for payment at maturity, when the par value/ face value of bond are returned to the investors. Bonds usually pay fixed periodic interest installments, called coupon payments. Some bonds pay variable income. When investor buys bond, he or she becomes a creditor of the issuer. Buyer does not gain any kind of owner ship rights to the issuer, unlike in the case with equity securities.

Investment and Portfolio Management BAF106

Identification and classification of bonds

The main advantages of bonds to the investor: They are good source of current income; Investment to bonds is relatively safe from large losses; In case of default bondholders receive their payments before shareholders can be compensated.

A major disadvantage of bonds is that potential profit from investment in bonds is limited.

Investment and Portfolio Management BAF106

Identification and classification of bonds

Investment in bonds decision making process: 1. Selection of bonds type according to the investors goals (expected income and risk). 2. Bond analysis (quantitative and qualitative). 3. Bond valuation.

4. Investment decision making

Investment and Portfolio Management BAF106

Bonds Classification by their key features

By form of payment: Non-interesting bearing bonds - bonds issued at a discount. Throughout the bonds life its interest is not earned, however the bond is redeemed at maturity for face value. Regular serial bonds - serial bonds in which all periodic installments of principal repayment are equal in amount. Deferred interest bonds bonds paying interest at a later date; Income bonds bonds on which interest is paid when and only when earned by the issuing firm; Indexed bonds - bonds where the values of principal and the payout rise with inflation or the value of the underlying commodity; Optional payment bonds bonds that give the holder the choice to receive payment on interest or principal or both in the currency of one or more foreign countries, as well as in domestic currency.
Investment and Portfolio Management BAF106

Bonds Classification by their key features

Coupon payment: Coupon bonds bonds with interest coupons attached; Zero-coupon bonds bonds sold at a deep discount from its face value and redeemed at maturity for full face value. The difference between the cost of the bond and its value when redeemed is the investors return. These securities provide no interest payments to holders; Full coupon bonds bonds with a coupon rate near or above current market interest rate; Floating-rate bonds debt instruments issued by large corporations and financial organizations on which the interest rate is pegged to another rate, often the Treasury-bill rate, and adjusted periodically at a specified amount over that rate

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Collateral: Secured bonds bonds secured by the pledge of assets (plant or equipment), the title to which is transferred to bondholders in case of foreclosure; Unsecured bonds bonds backed up by the faith and credit of the issuer instead of the pledge of assets. Debenture bonds bonds for which there is no any specific security set aside or allocated for repayment of principal; Mortgage bonds (or mortgage-backed securities) bonds that have as an underlying security a mortgage on all properties of the issuing corporation;

Sinking fund bonds bonds secured by the deposit of specified amounts. The issuing corporation makes these deposits to secure the principal of the bonds, and it is sometimes required that the funds be invested in other securities;

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Collateral: Asset-Backed Securities (ABS) similar to mortgage bonds, but they are backed by a pool of bank loans, leases and other assets. The ABS are related with the new market terminology securitization which understood as the process of transforming lending vehicles such as mortgages into marketable securities. General obligation bonds bonds, secured by the pledge of the issuers full faith and credit, usually including unlimited tax-power; Guaranteed bonds bonds which principal or income or both are guaranteed by another corporation or parent company in case of default by the issuing corporation;

Participating bonds bonds which, following the receipt of a fixed rate of periodic interest, also receive some of the profit generated by issuing business;
Revenue bonds bonds whose principal and interest are to be paid solely from earnings.
Investment and Portfolio Management BAF106

Bonds Classification by their key features

Type of circulation: Convertible bonds bonds that give to its owner the privilege of exchanging them for other securities of the issuing corporation on a preferred basis at some future date or under certain conditions; Interchangeable bonds bonds in coupon form that can be converted to the other form or its original form at the request of the holder paying the service charge for this conversion.

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Type of issuers: Treasury (government) bonds an obligation of the government. These bonds are of the highest quality in each domestic market because of their issuer Government. This guarantee together with their liquidity makes them popular with both individual and institutional investors. The government bonds are dominant in the fixed-income market. Municipal bonds - bonds issued by political subdivisions in the country (county, city, etc.); Corporate bonds a long-term obligation of the corporation; Industrial bonds bonds issued by corporations other than utilities, banks and railroads. This debt is used for expansion, working capital and retiring other debts; Public utility bonds high quality debt instruments issued by public utility firms.

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Recall possibility: Callable (redeemable) bonds bonds issue, all or part of which may be redeemed by the issuing corporation under definite conditions, before the issue reaches maturity; Noncallable (irredeemable) bonds bonds issued which contains no provision for being called or redeemed prior to maturity date

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Place of circulation: Internal bonds - bonds issued by a country payable in its own currency; External bonds - bonds issued by government or firm for purchase outside the nation, usually denominated in the currency of the purchaser. The term Eurobond is often applied to these bonds that are offered outside the country of the borrower and outside the country in whose currency the securities are denominated. As the Eurobond market is neither regulated nor taxed, it offers substantial advantages for many issuers and investors in bonds.

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Quality: Gilt-edged bonds high-grade bonds issued by a company that has demonstrated its ability to earn a comfortable profit over a period of years and to pay its bondholders their interest without interruption; Junk bonds - bonds with low rating, also regarded as high yield bonds. These bonds are primarily issued y corporations and also by municipalities. They have a high risk of default because they are issued as unsecured and have a low claim on assets.

Investment and Portfolio Management BAF106

Bonds Classification by their key features

Other types of bonds: Voting bonds - unlike regular bonds, these bonds give the holder some voice in corporation management; Senior bonds - bonds which having prior claim to the assets of the debtor upon liquidation; Junior bonds bonds which is subordinated or secondary to senior bonds

Investment and Portfolio Management BAF106