FIXED INCOME ANALYSIS Tarek.Amyuni@skema.edu 04 93 95 45 97 OFFICE 267 (SKEMA) Assistant : Sandrine Charron 04 93 95 45 18.

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Presentation transcript:

FIXED INCOME ANALYSIS Tarek.Amyuni@skema.edu 04 93 95 45 97 OFFICE 267 (SKEMA) Assistant : Sandrine Charron 04 93 95 45 18

FINANCIAL TIMES INTERNATIONAL CAPITAL MARKET ADVANCED CALCULATOR ALL INFO ON CLASS ON «KNOWLEDGE »

GENERAL INVESTMENT INFORMATION

WHAT IS A BOND ? A BOND IS A DEBT INSTRUMENT REQUIRING THE ISSUER TO REPAY TO THE LENDER/INVESTOR THE AMOUNT BORROWED PLUS INTEREST OVER A SPECIFIC PERIOD OF TIME

ISSUER PRINCIPAL COUPON MATURITY DATE

$200,000,000 IBM 5% 20/01/2022 COUPON PRINCIPAL MATURITY DATE ISSUER

4 MAJOR ISSUERS sovereign GOVERNMENT AGENCIES CORPORATIONS MUNICIPALITIES FEDERAL GOVERNEMENTS

MATURITY DATE THE TERM TO MATURITY OF A BOND IS THE NUMBER OF YEARS OVER WHICH THE ISSUER HAS PROMISED TO MEET THE CONDITIONS OF THE OBLIGATION. SHORT-TERM : 1-5 YEARS INTERMEDIATE : 5-12 YEARS LONG –TERM: >12 YEARS

PRINCIPAL + COUPON RATE THE PRINCIPAL OF A BOND IS THE AMOUNT THAT THE ISSUER AGREES TO REPAY THE BONDHOLDER AT THE MATURITY DATE. (face value) THE COUPON RATE IS THE RATE OF INTEREST THAT THE ISSUER AGREES TO PAY EACH YEAR. (Example : a bond with an 8% coupon and a principal of $1000 will pay annual interest of $ ) 80 WHAT ARE ZERO-COUPON BONDS ?

FIXED RATE BONDS : BONDS WHOSE COUPONS ARE FIXED THROUGHOUT THE LIFE OF THE BOND. FLOATING RATE BONDS : BONDS WHOSE COUPONS ARE RESET PERIODICALLY ACCORDING TO A PREDETERMINED BENCHMARK.

CURRENT YIELD COUPON Current Yield = -------------- Bond Price Deficient way to evaluate a bond because it does not take into account the principal to be paid at maturity.

YIELD TO MATURITY RATE OF INTEREST AN INVESTOR WOULD GET IF : BOND IS HELD TO MATURITY ALL COUPONS ARE REINVESTED AT CURRENT RATE YTM IS THE DISCOUNT RATE AT WHICH THE PRESENT VALUE OF FUTURE PAYMENT = PRICE OF THE SECURITY

YIELD TO MATURITY This is the rate at which you compare each bond within : Its maturity Its rating

PRICE QUOTES THE PRICE OF BONDS ARE QUOTED AS PERCENTAGE OF FACE VALUE A BOND WITH A FACE VALUE OF $1000 AND A PRICE OF 91 ¾ (% of face value) HAS A MARKET VALUE OF $ $917.50

CALL AND REFUNDING PROVISIONS A CALL PROVISION GIVES THE ISSUER THE RIGHT TO RETIRE THE DEBT, FULLY OR PARTIALLY, BEFORE THE SCHEDULED MATURITY. WHY WOULD A COMPANY DECIDE TO BUY BACK ITS DEBT ? WOULD A CALLABLE BOND HAVE A HIGHER OR LOWER YIELD THAN A NON-CALLABLE BOND ? WHY?

THE CALL FEATURES ARE STATED AT THE ISSUANCE OF THE BOND. THE CALL PRICE IS USUALLY HIGHER OR EQUAL THAN THE PRINCIPAL: CALL PREMIUM CALL PROTECTION PERIOD : BOND CANNOT BE CALLED BEFORE THAT DATE

CONVERTIBLE BONDS CONVERSION RATIO vs. CONVERSION PRICE A CONVERTIBLE BOND IS A BOND THAT CAN BE EXCHANGED FOR SPECIFIED AMOUNT OF COMMON STOCK IN THE ISSUING FIRM. CONVERSION RATIO vs. CONVERSION PRICE

QUESTIONS WHAT ARE THE RISK ASSOCIATED WITH INVESTING IN BONDS ? WHAT IS A FLOATING RATE BOND ? WHAT IS THE MARKET VALUE OF A BOND PRICED AT 94 WITH A $1000 FACE VALUE ?