Determinants of Bond Yields
interest rates are determined in the capital markets by the supply/demand for capital
a bond investor wants to be compensated for - inflation
- risk
- earn a return
- the yield for a specific bond = real interest rate
+ inflation premium
+ default risk premium
+ maturity risk premium
real interest rate & inflation premium is about equal or great than 90 day Tbill rate
default risk premium = (yield on this bond - yield on fed bond of same maturity)
maturity risk premium = (yield on this bond - yield on bond of same issuer but diff maturity)
Yield Curve = relation between bond yield & time to maturity at a point in time
Long Term Debt
promise to pay interest (coupon) & repay principal
par - face value - amount paid at maturity - base of $100
discount - price below $100, premium - price above $100
denomination - face value, $1,000, $10,000 or larger
term to maturity - remaining life of bond
liquid - good trading volume
negotiable - in deliverable form
marketable - ready market
Trustee - represents interests of bondholder
- ensures that interest paid, protective covenants maintained, take action if not
- administer sinking fund provisions
Trust Deed - sets forth all protective covenants (restrictions) and requirements of the bond issue
- protective covenants - to safeguard bondholder
Government Bonds
Marketable - fed gov't is largest issuer in Cdn bond market - mostly non-callable
- introduce Real Return Bonds in '91 - interest & prin repayment based on inflated value of original principal
CSB - cash at bank any time - no secondary market - only purchased by Cdns
- maximum purchase limits - must be registered
- regular interest & compound interest
- Canada Premium Bond
Tbills - short term gov't note - most significant money market instrument
- sold at discount & mature at par - difference is taxable as interest income
- sold in auction by BOC - purchased by large institutions & resold to clients in smaller denominations
Provincial - borrow extensively in foreign markets - also issue Tbills & Provincial Savings Bonds
bond quality factors -
Municipal - usually using serial bonds
credit quality factors -
TYPE of Bond by Security
Mortgage Bonds - secured by specific fixed assets
Collateral Trust Bond - secured by securities
Equipment Trust Certificate - secured by equipment
Debentures - unsecured, security is general creditworthiness of company
Subordinate Debentures - unsecured, junior to another security
No comments:
Post a Comment