Bond Funds
The world market capitalization of bonds is larger than that of equity. The international market for bonds comprises three major categories viz. domestic bonds, foreign bonds, and Euro bonds.
• Domestic bonds are issued by the domestic borrower in the domestic market usually in domestic currency
• Foreign bonds are issued on the domestic market by a foreign borrower, usually in domestic currency. The rules and regulations governing issuing and trading procedures are under the control of domestic authorities.
• Eurobonds are issued in countries other than the country in whose currency they are denominated. They are not traded on a particular national bond market and therefore, are not regulated by any domestic markets.
Financing and investing in the international bond market is both technical and difficult. This stems from the vast diversity in regulation, instruments, terminology and technique.
Basically this is due to the taxing policies varing from market to markets. Instruments range from straight, single-currency bonds and floating rate notes to multi-currency issues with complex option clauses. Interest paid is semi-annual or annual basis depending on the markets. International bond management requires a through knowledge of the techniques necessary to manage bond portfolios. It also requires familiarity with wide range of markets and market instruments.
Prices and yields:
Current Yields: The Price of a bond is expressed as a percentage of its Face or Nominal value. The simplest expression is the ratio of coupon to current price and is called current yield or flat yield.
Yield to maturity: Yield to maturity gives the bonds true acturial yield. Yield to maturity is the interest figure quoted most frequently by investors and professionals. It is the rate that equates the present value of the bonds cash flows with present market value of the bond. Bond cash flows are composed of three elements, viz. interest payment, principal payments, and accrured interest payments.
Yield to average life: Many bonds are not repaid in fine. They are progressively paid off during their life through the sinking funds provision. Investors and professionals then speak of the bonds average life. The average life is a weighted average of the bonds principal repayments.
Yield to call: Some bonds do not have sinking funds provisions but are issued with a call options where the issuer has the right to call back the bond before its maturity date. It will be in the interest to do so if the interest rates fall below the bonds coupon rate. He will be able to call the outstanding bond in, pay it off and issue new debt at the lower rate. Here some investors like to calculate the yield on the bonds up to the date that call option takes effect. They call it Yield to call.
Duration and Convexity: They are the most important analytical tools for Bond Managers. Duration is weighted average maturity of a bond where each date is weighted by the present value of the cash flow that the bond pays at that date. Convexity is a better estimation of interest rate risk can be obtained by including the concept.
Issuing procedures:
Issuing procedures have evolved since the Eurobond markets inception, especially where syndication is concerned. The traditional issuing procedure called European, was a cumbersome process and could take several weeks. Final investors were institutions such as pension fund, investment fund, and insurance companies, as well as private individuals attracted by the absence of withholding tax and the anonymity of bearer certificates. Market Uncertainity forced syndicating banks to speed up the issuing procedures in order to enable them and borrowers to take advantage of the everchanging market conditions. The accelerated issuing procedure, called a bought deal, resembles the banking sectors club deal in the European market. It brought on a reduced size of the organizing syndicates and a concerntration of the offer on institutional investors. It also increased competition between potential organizers and participants and gave rise to new safety techniques such as the pre-offered prices.
In finance a bond is a debt security in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupuon) at a later date, termed maturity. Other stipulations may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bondholder, or limitations on the behavior of the issuer. Bonds are generally issued for a fixed term (the maturity) longer than one year.
A bond is just a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investment with external funds.
Debt securities with a maturity shorter than one year are typically bills. Certificate of Deposits(CDs) or commercial papers are considered money markets instruments.
Traditionally, the U.S. Tresury uses the word bond only for their issues with a maturity longer than ten years, and calls issues between one and ten year notes. Elsewhere in the market this distinction has disappeared, and both bonds and notes are used irrespective of the maturity. Market participants use bonds normally for large issues offered to a wide public, and notes rather for smaller issues originally sold to a limited number of investors. There are no clear demarcations. There are also "bills" which usually denote fixed income securities with three years or less, from the issue date, to maturity. Bonds have the highest risk, notes are the second highest risk, and bills have the least risk. This is due to a statistical measure called duration, where lower durations have less risk, and are associated with shorter term obligations.
Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the issuer. Also bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitly.
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