3 Chapter - Overview of Bond Sectors and Instruments
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Internal bond market is also called the national bond market and is divided into
domestic and foreign bond market
External bond market is also referred to as the Eurobond market that is
underwritten mainly by an international syndicate
US Treasury securities: Bills, Notes, Bonds and TIPS (definition) (Bloomberg)
TIPS Computation of inflation adjustments (Principal and Coupon)
Sovereign debt is the obligation of a countrys central government (foreign bonds)
Treasury bills are discount securities and have a maturity of one year or less
Treasury note is a coupon bearing security which when issued has an original
maturity between 2 and 10 years.
Treasury bond, similarly, has an original maturity greater than 10 years
TIPS are securities whose principal and coupon payments are tied to the CPI
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Concept of TIPS and the reason for the treasury issuing tips INFLATION? p1
The most recently auctioned treasury is called the On-the-run. Off-the-run issues
are issues that are auctioned prior to the current on-the-run issues
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Chapter 3 contd
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Zero coupon treasury securities are created by dealers, stripping the coupon
payments and principal payments of a treasury coupon security
Strips created from coupon payments are called coupon and strips those created
from the principal are called principal strips
Mortgage-backed securities (MBS) are securities backed by a pool of residential
mortgage loans whose cash flows consists of principal and interest paid by
borrower p3
Prepayments occur when a home owner decides to refinance his/her mortgage
loan at a lower interest rate and can be made at any time and is repaid at par
value
Prepayment risk is the uncertainty about the cash flows due to prepayments
The five govt. sponsored enterprises (GSEs) are Freddie Mac, Fannie Mae, Home
Loan Bank, Sallie Mae and the Farm Credit System, they issue debentures that
are bought by foreign central banks, pension funds, banks, mutual funds and
insurance companies. FNMA and FHLMC also issue mortgage-backed securities
Muni securities are debt obligations issued by state & local governments they
issue either tax backed debt or revenue bonds
Tax backed debt are secured by tax revenue are also called general obligation
bonds
Revenue bonds are secured by revenues from the project itself (hospitals, bridges
etc.)
End of Chapter Questions : 4, 7, 8, 9, 11, 12, 13, 14, & 15
Homework problems
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Active US Treasuries
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Active US TIPS
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US Treasury 10yr Breakeven Yield History
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Mortgage Payment Calculator
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Impact of Prepayments
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Impact of Prepayments
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Impact of Prepayments
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