Chapter 1 - 1 Chapter 1 Features of Debt Securities 2 Plan...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Chapter 1 Features of Debt Securities 2 Plan of the lecture Basic features of a bond Bond covenants Coupon rate structures Floating rate securities Accrued interest Options embedded in a bond Borrow funds to purchase bonds 3 Basic features of a bond In investment management, the most important decision is the allocation of funds across asset classes Two major asset classes are equities (or stocks ) and fixed income securities Alternative asset classes : real estate, hedge funds, private equity, and commodities (e.g., crude oil, gold) etc. 4 Basic features of a bond Fixed income securities (or debt securities ) are securities whose income is literally fixed The issuer (i.e., the borrower ) of a fixed income security promises to pay a specified ( fixed ) sum of money at specified ( fixed ) future dates In contrast, the dividend on an equity is not fixed , but dependent on the issuing firms performance 5 Basic features of a bond Types of fixed income securities Bonds (the most common type, already covered in ADMS3530 ) Mortgage backed securities (see Chapter 10 ) Asset backed securities (e.g., securities backed by auto loans, student loans, credit card receivables , see Chapter 11 ) Bank loans 6 Basic features of a bond The investor who purchases a debt security is called the lender (or creditor ) compare the lender to the issuer (or borrower ) The payment that an issuer promises to make at specified future dates consist of: interest (or coupon ) and principal payment (i.e., repayment of funds borrowed) 7 Basic features of a bond The term to maturity (or simply maturity or term ) of a bond is the number of years remaining prior to the final principal payment The maturity date of a bond refers to the date that the bond will cease to exist, at which time the issuer will repay the outstanding balance For example, a bond is due 12/16/2015 8 Basic features of a bond Bonds can have any maturity Typically the longest maturity is 30 years But Walt Disney Co. issued an 100-year bond in 1993 Short term : a maturity between 1 and 5 years Intermediate term : a maturity between 5 and 12 years Long term : a maturity of more than 12 years 9 Basic features of a bond The par value (or principal value , face value , and maturity value ) of a bond is the amount that the issuer promises to repay the bondholder (i.e., lender) at or by the maturity date. It is also the amount borrowed 10 Basic features of a bond Bonds can have any par value The market practice is to quote the price of a bond as a percentage of its par value Example : suppose a bond has a par value of $1,000 If the bond sells at $1,000, the bond price is quoted...
View Full Document

This note was uploaded on 05/01/2011 for the course ADMS 4504 taught by Professor Lee during the Fall '08 term at York University.

Page1 / 33

Chapter 1 - 1 Chapter 1 Features of Debt Securities 2 Plan...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online