Analysis of Investments & Management of Portfolios Chapter17.

Chapter 17: Bond Fundamentals

Analysis of Investments & Management of Portfolios

10TH EDITION

Reilly

& Brown

© 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Basic Features of a Bond

• Bonds as fixed income securities

– Pay a fixed amount of interest periodically to the holder of record – Repay a fixed amount of principal at the date of maturity

• Bond market is divided by maturity

– Money Market: Short-term issues that mature within one year – Notes: Intermediate-term issues that mature between one and ten years – Bonds: Long-term obligations with maturity greater than ten years

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© 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Bond Characteristics

• Intrinsic Features

– Coupon: Determine the periodic interest income – Term to maturity: Term bond or a serial bond – Principal value: Different from market value and the common principal or par value is $1,000 – Type of ownership: Bearer vs. registered bonds

• Types of Issues

– Secured (senior) bonds – Unsecured bonds (debentures) – Subordinated (junior) debentures

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© 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Bond Characteristics

• Indenture provisions

– The indenture is the contract between the issuer and the bondholder specifying the issuer’s legal requirements

• Features affecting a bond’s maturity

– – – – – Callable (call premium) Noncallable Deferred call Nonrefunding provision Sinking fund

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© 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Rates of Return on Bonds

• The Computations of Bond Return

– Holding period return

HPR i,t 

Pi,t 1 ...