363LecNote-Part2

363LecNote-Part2 - 3 Bonds 3.1 Bonds Basics Convention Face...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
3 Bonds JamesBondisa f ctional MI6 (UK Secret Intelligence Service) agent whose codename is 007. 3.1 Bonds Basics Convention Face value = Principal. Also called “par value”. Typ- ically $1 , 000 in the U.S. Coupon rate Coupon rate × Principal = Interest paid per year (e.g.) coupon rate = 6% Payment interval and compounding frequency US: at the end of every 6 months, semi-annual Europe: at the end of every year, annual Types of Bonds Zero-coupon bonds: Single payment ( FV : face value or principal) at fu- ture date ( n : maturity). Also called “discount bonds”. The current price of the bond is PV. Periods 0 1 2 ··· n 1 n cash F ows PV 00 ··· 0 FV Coupon bonds: Coupons ( PMT )pa idattheendo feachpe r iod .A t maturity, both coupon and the principal ( FV )arepaid at maturity. Periods 0 1 ··· n 1 n cash F ows
Background image of page 1

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

View Full DocumentRight Arrow Icon
U.S. Treasury Securities Considered default-free. Treasury Bills (T-Bills): Original maturity 1 year (typically, 13, 26, and 52 weeks). Issued as zero coupon bonds (discount bonds). Treasury Notes (T-Notes): 1yea r Original Maturity 10 years (typi- cally 2, 5, and 10 years). Semi-annual coupon payments. Treasury Bonds (T-Bonds): 10 year < Original Maturity. Semi-annual coupon payments. Treasury STRIPS Break out coupons and principal separately. Each stripped payment is traded as zero coupon bond. Treasury In f ation Protection Securities (TIPS) Principal is linked to the consumer price index. Provide protection against in f ation. Other Bonds Corporate bonds Issued by corporations. Default and liquidity risk can be large. Municipal bonds Issued by state and local governments. Exempt from federal taxes. Agency bonds Issued by Federal Agencies, e.g., Fannie Mae. Mortgage-backed and other asset-backed securi-
Background image of page 2
Bond Credit Rating source: Fidelity’s webpage. Investment grade: Usually Triple-B or higher. Bond rating agencies (e.g., Moody’s, S&P) con- sider, among others, Interest coverage ratio, Leverage, Pro f tability and its variability, Collateral, . .. March 13, 2009, 12:01AM EST The Triple-A Rating: Going Extinct? The AAA credit rating, the gold standard in corpo- rate f nance, isn’t just an endangered species. ”It’s almost extinct at this point in Corporate America,” says Nicholas Riccio, managing director of Standard On Mar. 12, Standard & Poor’s took the prized triple- A rating away from General Electric (GE). The move, from AAA to AA+–still at the upper echelon of cor- porate credit quality–was widely expected by f xed- income investors, who fretted for months over GE’s exposure to bad debt through its GE Capital arm. ... Just Five AAA Holders
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/05/2011 for the course FINA 363 taught by Professor Masoudie during the Spring '10 term at South Carolina.

Page1 / 29

363LecNote-Part2 - 3 Bonds 3.1 Bonds Basics Convention Face...

This preview shows document pages 1 - 4. Sign up to view the full document.

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