MFIN 503 FIXED INCOME
Basics of Fixed-Income
Securities and Markets
Important Elements
• The bond’s features
• Issuer, maturity, par value, coupon rate,
payment frequency, currency denomination, etc.
• The legal, regulatory and tax considerations
• The contingency provisions
• Callable, putable and convertible bonds
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Types of Bond Issuer
• Sovereign governments
• Non-sovereign governments
• Quasi-government entities
• Corporates
• Supranational organizations
• Others
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Maturity
• Money markets
• Where securities with original maturities ranging
from overnight to one year are issued and
traded.
• Capital markets
• Where securities with original maturities longer
than one year are issued and traded.
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Principal and Interest
• Par value is the amount the issuer agrees to pay
the bondholder when the bond matures.
• Coupon rate is the interest rate that the issuer
agrees to pay each year.
• Payment frequency: annual, semiannual, quarterly
or monthly
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Coupon Payment Structures
• Floating-rate notes (FRNs)
• Cap, floor and collar
• Inverse or reverse FRNs
• Step-up coupons
• Credit-linked coupons
• Payment-in-kind coupons
• Deferred coupons
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Amortization
• Bullet bonds
• Amortizing bonds
• Fully amortized bonds
• Partially amortization bonds; balloon payment
• Sinking fund
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Currency
• The majority of bond issues were made in either
US dollars or euros.
• Dual-currency bonds
• Currency option bonds
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Bond Indenture
• The bond indenture (or trust deed) is the legal
contract that describes the form of the bond, the
obligations of the issuer, and the rights of the
bondholders.
• Legal identify of the issuer
• Source of repayment proceeds
• Collateral
• Credit enhancement
• Covenants
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Collateral
• Secured bonds are backed by assets or financial
guarantees pledged to ensure debt repayment in
the case of default.
• Unsecured bonds have no collateral; bondholders
have a general claim on the issuer’s assets and
cash flows.
• Are debentures secured or unsecured bonds?
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Credit Enhancement
• Internal credit enhancement
• Subordination
• Overcollateralization
• Excess spread
• External credit enhancement
• Bank guarantee
• Letter of credit
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Covenants
• Positive (affirmative) covenants
• Negative covenants
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Regulatory Considerations
• An important consideration for investors is where
the bonds are issued and traded.
• National bond markets
• Domestic bonds
• Foreign bonds
• Samurai, Kangaroo, Bulldog, Panda, Yankee,
etc.
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Regulatory Considerations
• Eurobond markets
• Eurobonds are issued internationally, outside
the jurisdiction of any single country, and are
subject to a lower level of listing, disclosure and
regulatory requirements than domestic or
foreign bonds.
• Eurodollar, euroyen, euro-denomincated
Eurobonds
• Global bonds
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Index-Linked Bonds
• Inflation-linked bonds, or linkers
• Interest-indexed vs. capital-indexed bonds
• Treasury inflation-protected securities (TIPS)
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Embedded Options
• Callable bonds
• Putable bonds
• Convertible bonds
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Bond Investors
• Central banks
• Institutional investors
• Pension funds
• Foundations and endowments
• Insurance companies and banks
• Mutual funds and hedge funds
• Sovereign wealth funds
• Retail investors
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Types of Bond Market
• Primary vs. secondary markets
• Public offering vs. private placement
• Underwritten offering, best effort offering, shelf
registration, auction, etc.
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Underwriting Process
• Determination of funding needs
• Selection of underwriter
• Structuring and announcement of bond offering
• Pricing
• Issuance and closing
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Other Types of Debt Securities
• Commercial paper
• Negotiable certificates of deposit
• Repurchase agreements
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