BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET BOND MARKET
BOND MARKET BOND MARKET
Debt Markets
MORTGAGE MARKET MORTGAGE MARKET
MORTGAGE MARKET MORTGAGE MARKET
MORTGAGE MARKET MORTGAGE MARKET
Pangan,
MORTGAGE MARKET Kris Yna MARKET
MORTGAGE Lyssa
MORTGAGE MARKET
C. MORTGAGE MARKET
MORTGAGE MARKET MORTGAGE MARKET
MORTGAGE MARKET MORTGAGE MARKET
MORTGAGE MARKET
MORTGAGE MARKET MORTGAGE MARKET
MORTGAGE MARKET
Debt Markets
Debt markets are used by both firms and
governments to raise funds for long-term
purposes, though most investment by firms is
financed by retained profits.
Debt Markets
include:
Primary Market – the market in which
newly issued instruments are bought
Secondary Market – in which existing
or secondhand instrument are traded
Important Market
Segments
Government Debt Securities
Debt Securities Issued by Financial
Institutions (MFIs and Non-MFIs)
Monetary Financial Institutions - includes all financial
institutions whose business is
(1) to receive deposits and/or close substitutes for deposits from
entities other than MFIs and
(2) to grant for their own account credit and/or invest in securities.
Issued by Non-Financial Corporations
Bond Markets
Bonds are long-term debt securities that are
issued by government agencies or
corporations.
The issuer of bond is obligated to pay interest
(or coupon) payments periodically (such as
annually or semiannually) and the par value
(principal) at maturity.
Bond Prices
fluctuates
An issuer must be able to show
that its future cash flows will be
sufficient to enable it to make its
coupon and principal payments to
bondholders.
Investors consider buying bonds
for which the repayment is
questionable only if the expected
return from investing in the bonds is
sufficient to compensate for the risk.
Institutional Participation in Bond Markets
Financial Participation In Bond
Institutions Markets
Commercial Banks and • Purchase bonds for their asset portfolio
Savings and Loan • Sometimes places municipal bonds for municipalities
Associations (S And Ls) • Sometimes issue bonds as a source of secondary capital
Financial Companies • Commonly issue bonds as a source of long-term funds
Mutual Funds • Use funds received from the sale of shares to purchase
bonds. Some bonds mutual funds specialize in particular
types of bonds, while others invest in all types.
Brokerage Firms • Facilitate bond trading by matching up buyers and sellers of
bonds in the secondary market
Investment Banking • Place newly issued bonds for governments and corporations.
Firms They may places the bonds and assume the risk of market
price uncertainty or place the bonds on the best-efforts basis
in which they do not guarantee a price for the issuer.
Insurance Companies • Purchase bonds for their asset portfolio
Classification of Bonds According to Issuers
Household and Institutional Investors
₱ Bureau of the ₱ Spending on
Treasury Government Programs
Purchases of Mortgages
₱ ₱
Federal Agencies Originated by Financial
Institutions
Spending on State and
₱ ₱
Municipalities Local Government
Programs
₱ ₱ Spending to Expand
Corporations Operations
Classification of Bonds
According to Ownership Structure
Bearer Bonds – require the owner to clip
coupons attached to the bonds and send
them to the issuer to receive coupon
payments.
Registered Bonds – require the issuer to
maintain records of who owns the bond
and automatically send coupon payments
to the owners.
Types of Bonds
Callable and Putable Bonds
Convertible Bonds
Eurobonds
Euro Bonds
Floating Rate Notes (FRNs)
Foreign Bonds
Index-Linked Bonds
Junk Bonds
Strips
Bond Yields
The Yield on Bonds are
expressed commonly in two
forms:
Interest yield (or running yield)
– the return on a bond taking account
only of the coupon payments
Yield on maturity or redemption
yield
– the return on a bond taking account of
Bond yields are
influenced by
interest-rate
expectations, the
term premium,
credit risk and
liquidity.
Risk Premium
A risk premium is the return in excess
of the risk-free rate of return an
investment is expected to yield; an
asset's risk premium is a form of
compensation for investors who
tolerate the extra risk, compared to that
of a risk-free asset, in a given
investment.
Liquidity is the ease with which an investor can
sell or buy a bond immediately at a price close to
the mid-quote (the average of the bid-ask spread).
Three Dimensions
of Liquidity
Tightness
Depth
Resiliency
The spread between the yield of a bond with liquidity and
a similar bond with less liquidity is referred to as the
liquidity premium.
Credit Risk
– the risk of loss because of the failure of a
counterpart to perform according to a
contractual agreement, for instance due to
a default by a borrower.
Credit Risk Premiums
The spread between the yield of particular
bond and the yield of a bond with similar
characteristics but without credit risk
The yield on bonds
depends on whether
it is viewed from
the perspective of
the issuer of the
bond, who is
obligated to make
Yield from the Issuer’s Perspective
Yield to Maturity - reflects the
annualized yield that is paid by the issuer
over the life of the bond.
The yield to investors
consists of two
components:
(1) A set of coupon payments and
(2) The difference between the par value that the issuer must
pay to investors at maturity and the price it received when
Yield from the Investor's Perspective
Holding Period Return - or the
return from the investment over a
particular period.
Very short time period (such as less than one year),
- may estimate their holding period return as the sum of the
coupon payments plus the difference between the selling price and
the purchase price of the bond, as a percentage of the purchase
price.
Relatively long holding periods
- annualized discount rate that equates the payments received to
the initial investment.
Treasury and Federal Agency Bonds
The Treasury obtains
long-term funding
through Treasury bond
offerings, which are
The treasury announces its plans
VIEW
conducted through
for an auction, including the date,
NEXT periodic auctions
the amount of funding that it needs,
PAGE and the maturity of the bonds
FOR issued.
PHOTOS!
Schedule
s
Source: Bureau of the
Treasury PH
Bids can be submitted
on a competitive or a
noncompetitive
Competitive basis.
Basis – specify the price
that the bidder is willing to pay and an
amount of securities to be purchased.
Noncompetitive Bids – specify only
an amount of securities to be
purchased (subject to a maximum
limit.)
Trading Treasury Bonds
Both dealers serve intermediaries in the
secondary market by matching up buyers and
sellers of Treasury bonds, and they also take
positions in these bonds.
Bid price is what
If you are selling a stock, you
buyers are willing
are going to get the bid
to pay for it.
price, if you are buying a
Ask price is what stock you are going to get
sellers are willing
the ask price.
to take for it.
When the BSP (Federal
Reserve in PH) engages in open
market operations, it normally
conducts trading with the
primary dealers of government
securities. The primary dealers
also trade Treasury bonds
among themselves.
Investors can contact their
broker to buy or sell Treasury
bonds. The brokage firms serve
as an intermediary between the
investors and the bond dealers.
Online Trading - investors can also buy bonds
through the Treasury Direct program (www.treasury.direct.gov).
They can have the Treasury deduct their purchase from their bank
account. They can also reinvest proceeds received when Treasury
bonds mature into newly issued Treasury bonds.
Online Quotations - Treasury bond prices are
accessible online at www. investinginbonds.com. This website provides
the spread between the bid and the ask (offer) price for various
maturities. Treasury bond yields are accessible online at
www.federalresrve.gov/releases/H15/. The yields are updated daily
and are given for several different maturities.
Stripped Treasury Bonds
One security would represent the payment of
principal upon maturity. Each other securities
would represent payments of interest at the
end of a specified period.
All newly formed securities are
Zero-Coupon Securities. Each
security has only one payment
that occurs upon its maturity.
Inflation-Indexed Treasury Bonds
These bonds, commonly referred to as TIPS (Treasury
Inflation-Protected Securities), are intended for
investors who wish to ensure that the returns on their
investment keep up with the increase over time.
Saving Bonds
Series EE Savings Bond - provides a market-
based rate of interest,
Series I Savings Bond - provide a rate of
interest that is tied to inflation
Federal Agency Bonds
The Federal National Mortgage
Association (Fannie Mae) and the Federal
Home Loan Mortgage Association
(Freddie Mac) issue bonds and use the
proceeds to purchase mortgages in the
secondary market.
Credit Crisis in 2
Municipal Bonds
General Obligation Bonds – payments are
supported by the municipal government’s ability
to tax
Revenue Bonds – payments must be generated
by revenues of the project (toll way, toll bridge,
state college dormitory, etc.) for which the bonds
were issued. More common than General
Obligation Bonds.
Call Provision which allows the issuer to
repurchase the bonds at a specific price before
the bonds mature.
Credit Risk of Municipal Bonds
• Ratings of Municipal Bonds
• Impact of the Credit Crisis on Municipal Bond
Risk
• Insurance against Credit Risk of Municipal
Bonds
Reduction of Newly Issued
Municipal Bonds
Trading and Quotations
of Municipal Bonds
Yield Offered on Municipal Bonds
The municipal bond must pay a risk premium to
compensate for the possibility of default risk.
Municipal bond must pay a slight premium to
compensate for being less liquid than Treasury bonds
with the same maturity.
The income earned from a municipal bond is exempt
from federal taxes. This tax advantage of municipal
bonds more than offsets their disadvantages and
allows municipal bonds to offer a lower yield than
Treasury bonds.
Corporate Bonds
- Long-term debt securities, issued by
corporations that promise the owner coupon
payments (interest) on semiannual basis.
Corporate bonds can be placed
with investors through
public offering
or a private placement.
Characteristics of Corporate Bonds
BOND INDENTURE - a legal document
specifying the rights and obligation of both the
issuing firm and the bondholders.
Sinking-Fund Provisi
Protective Covenan
