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BOND/DEBT MARKET CCIG. Size of Market  The global bond market is about $82 trillion. The global stock market hovers around $40-$50 trillion. So, on pure.

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Presentation on theme: "BOND/DEBT MARKET CCIG. Size of Market  The global bond market is about $82 trillion. The global stock market hovers around $40-$50 trillion. So, on pure."— Presentation transcript:

1 BOND/DEBT MARKET CCIG

2 Size of Market  The global bond market is about $82 trillion. The global stock market hovers around $40-$50 trillion. So, on pure size alone, the bond market is almost twice the size of the stock market. That’s a substantial difference.  Nearly all of the average daily trading volume in the U.S. bond market takes place between broker- dealers and large institutions in an OTC market

3 Graphical Depiction

4  A debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer  In return, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due. What Are Bonds?

5  Predictable income stream.  Portfolio diversification.  Great investment choice for IRA’s and 401k’s (retirement planning).  Either saving for your children’s college education or for a new home, fixed income can do the magic. Why Invest in Bonds?

6 Characteristics of Bond

7  Risk is proportional to return.  Safer investments offer lower returns. Hence Treasury rate is the lowest bond rate you can obtain on the bond market.  Key variables that comprise the risk profile of a bond: its price, interest rate, yield, maturity, redemption features, default history, credit ratings and tax status. Assessing Risk

8 Bond Price  C = coupon payment n = number of payments i = interest rate, or required yield M = value at maturity, or par value

9  Interest that can be fixed, floating or payable at maturity.  Fixed rate bonds carry any interest rate that is established when the bonds are issued (expressed as a percentage of the face amount) with semiannual interest payments  Floating rate bonds carries a rate which is reset periodically in line with interest rates on Treasury bills, the London Interbank Offered Rate (LIBOR), or some other benchmark interest-rate index.  Zero coupon bonds: Investor receives one payment at maturity that is equal to the purchase price (principal) plus the total interest earned. Bond Interest Rate

10  The longer a bond's term, the more its price may be affected by interest rate fluctuations. Hence, investors expect to be compensated for taking that extra risk.  This relationship can be best demonstrated by drawing a line between the yields available on similar bonds of different maturities, from shortest to longest. Such a line is called a yield curve. Time to Bond Maturity

11 Yield curve

12 Who issues bonds?  Government  Treasury  STRIPS  TIPS  Municipal (Tax Free Status)  Corporations

13 Rating Agencies  Moody  S&P  Fitch

14

15 3 Rates – Do Not Confuse  YTM – Yield to Maturity (IRR)  Coupon Rate  Current Yield

16 Risk  Interest Rate Risk  Longevity Risk  Inflation Risk

17 Application  Tax deductible of interest expenses for businesses  No control over voting rights  Negative impact on cash flow

18 Example Option 1Option 2 StockBonds Income before Interest and Taxes (EBIT) $ 40, Interest (8% * 100,000) $ - $ 8, Income before taxes $ 40, $ 32, Income Tax (35%) $ 14, $ 11, Net Income $ 26, $ 20, Shareholder's Equity $ 200, $ 100, ROE13%20.80%

19 Corporate Bonds

20 Quantitative Easing  Nov 2010: Government to spend $900 over the next 8 month to buy treasuries  91% bought on the shorter end of the spectrum  Combat the snail paced growth  Problems:  Inflation is low - possibly cause deflation since  QE1 – $600 billion -> $1.8 trillion

21  Individual Bonds  Most individual bonds are bought and sold in the over-the-counter (OTC) market, although some corporate bonds are also listed on the New York Stock Exchange.  The OTC market comprises securities firms and banks that trade bonds; brokers or agents, who buy and sell bonds on behalf of customers in response to specific requests; and dealers, who keep an inventory of bonds to buy and sell. How To Invest (1)

22  Bond Funds  Bond funds, like stock funds, offer professional selection and management of a portfolio of bonds for a fee.  Through a bond fund, an investor can diversify risks across a broad range of issues and opt for a number of other conveniences, such as the option of having interest payments either reinvested or distributed periodically.  Some funds are designed to follow a market, in general or a specified index of bonds. These are often referred to as index or passive funds.  Other funds are actively managed according to a stated objective, with bonds purchased and sold at the discretion of a fund manager. How To Invest (2)

23  Active vs. Passive.  Diversification : achieved in any number of ways.  1/ Bond Type: mix of high-yield and investment-grade bonds.  2/ Laddering: purchase securities of various maturities to mitigate interest rate risks. E.g. you might invest equal amounts in bonds maturing in 2, 4, 6, 8 and ten years. In two years, when the first bonds mature, you would reinvest the money in a 10-year maturity, maintaining the ladder.  Bond Swap:  The sale of a block of bond swaps and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.  The most common swap is done to achieve tax savings by converting a paper loss into an actual loss that could partially or fully offset other capital gains or income. Investment Strategy Considerations

24  Bond calculators :  Bonds investing: Reference websites


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