Practice investment management pim3 ch04 bond fundamentals

CHAPTER FOUR BOND FUNDAMENTALS A 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 South-Western / Thomson Learning © 2004 4-2 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 South-Western / Thomson Learning â 2004 4-3 Outline  The Financial Page Listing  Basic Information  Footnotes  Government Bonds  Bond Pricing and Returns  Valuation Equations • Annuities • Zero Coupon Bonds • Variable Rate Bonds • Consols South-Western / Thomson Learning © 2004 4-4 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 South-Western / Thomson Learning © 2004 4-5 Outline  Bond Risks  Price Risks • Default Risk • Interest Rate Risk  Convenience Risks • Call Risk • Reinvestment Rate Risk • Marketability Risk South-Western / Thomson Learning © 2004 4-6 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 of “Hertz sevens of 03” (Hertz 7s03)  A legal document called the indenture contains the details of the bond issue South-Western / Thomson Learning © 2004 4-7 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 South-Western / Thomson Learning © 2004 4-8 Bond Principles: Classification of Bonds Insert Table 4-1 here South-Western / Thomson Learning © 2004 4-9 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 South-Western / Thomson Learning © 2004 - 10 ... Bearer Bonds • Registered Bonds • Book Entry Bonds South-Western / Thomson Learning © 2004 4-3 Outline  The Financial Page Listing  Basic Information  Footnotes  Government Bonds  Bond Pricing... 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...Outline  Bond Principles  Identification of Bonds  Classification of Bonds • Issuer • Security • Term  Terms of Repayment • Interest Only • Sinking Fund • Balloon Loan Income Bond South-Western