BONDAND ITS TYPES

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Outline• Introduction to Bond• History of Bond• Features of Bond• Classification of Bond• Major Types of Bond• Other Types of Bond• Difference Between

Bond and DebentureBond and ShareBond and Loan

Introduction to Bond

• A bond is a debt instrument issued by governments,

corporations and other entities for raise funds.

Definition• A bond is a (written and signed

promise) debt investment in which aninvestor loans money to an entity (typicallycorporate or governmental) which borrowsthe funds for a defined period of time at avariable or fixed interest rate (CouponRate).

Definition• A bond is written and signed promise to pay a certain

sum of money on a certain date.

• A bond is a (written and signed promise) debtinvestment in which an investor loans money to anentity (typically corporate or governmental) whichborrows the funds for a defined period of time at avariable or fixed interest rate (Coupon Rate).

How Bonds Work ?

History of Bond

• Bonds have been around for thousands of years,dating back to as far as 2400 BC.

• Throughout the centuries, the use of bonds hasgrown exponentially, with both governments andcompanies using these securities for crucialfunding.

The First Bond Ever 2400 B.C.

• The first recorded bond in history dates back to 2400 B.C. – a stone discovered at Nippur, in Mesopotamia, now present-day Iraq.

• This particular bond guaranteed the payment ofgrain by the principal and the surety bondguaranteed reimbursement if the principal failed tomake payment. Corn was the currency of that timeperiod.

Fast Forward: Venetians Create Advanced Bond Markets

• During the 1100s, Venice began issuing governmentbonds to fund its wars, known as the Presiti.

• The city continued to evolve its bond marketthroughout the 14th century, when denizens ofVenice could purchase and trade governmentsecurities, which paid the owner an endless annuityat a set rate.

BOND’s

Feature of Bond

• Principal/Nominal/Par/Face-value

• Maturity

• Coupon/Interest

• Credit Quality

• Embodied Options

Classification of Bonds

• Secure and Unsecure

• Term bond , Serial Bond and Callable Bond

• Convertible and Non-Convertible

• Registered and Un-Registered or Bearer Bond

• Commodity Backed (Bond is not backed by cash)

Parties Involves in Bond

• Issuer

• Investment Bank? Underwriter

• Investor

Benefits of Investment in Bonds

• Diversification “don’t put all your eggs in one bucket”.

Cont.….

• Security

• Lower Initial Investment Requirements

Major Types of Bonds

Bond

Government Bond

Municipal Bond

Corporations Bond

Zero-Coupon Bond

Government Bond

Cont.…

• It is also known as Treasury Bond.

• It is issued by a national government, generally witha promise to pay periodic interest payment and torepay the face value on the maturity date.

• They are usually denominated in the country's owncurrency.

• It is safest bond with the lowest interest rate.

History

• The first ever bond issued by a national government was issued by the Bank of England in 1694 to raise money to fund a war against France.

Govt: Bonds Issued by Govt: of Pakistan

• Pakistan Investment Bond (PIB)

• US Special Dollar Bond

• Wapda Bond

• National Saving Bond (Prize Bond) and

• Sukuk

Municipal Bond

• A bond issued by state or local government or any of there agencies. Interest from these bonds is generally tax-free to residents but in some cases, interest is federally taxable.

• It is generally used to finance Public Project such as roads, schools, airports and seaports and infrastructure related.

• It is secured by specific revenue

• The interest receives holder of municipal bond is often exclude from income tax.

Potential Issuers

• States/Counties

• Cities

• Development Agencies (Capital Development Authority CDA) (Karachi Development Authority KDA)

• Other Govt: Agencies WAPDA

History of Municipal Bond

• Early days (1800s), Officially the first recordedmunicipal bond was a general obligation bond issuedby the City of New York for a canal in 1812.

• The debt was used to finance both urbanimprovements and a growing system of free publiceducation.

Municipal Bond Issuance Process

• Fiscal Strengthening and Capital Investment Planning

• Credit Rating

• Project Development

• Financial Structuring

• Financial Structuring

• Authorization of the Prospectus

• Marketing to Investors

• Preparation

• Completion of the Transaction

Corporate Bond

• A bond which is issued by a corporation in order toraise financing for a verity of reasons, such as toongoing operations or to expend business.

• The term is usually applied to longer term debtinstrument, with maturity of least one year.

• Corporate debt instrument with maturity shorterthan one year are referred as a commercial paper.

Trading

• Corporate bonds trade in decentralized, dealer-based, over the counter markets.

• Corporate bonds sometimes listed on stockexchanges those bonds are called Listed bonds.

• Vast majority of trading volume happens O.T.C.

Risk Analysis

• Compared to government bonds, corporate bondsgenerally have a higher risk.

• Corporate bond holders are stated for this risk byreceiving a higher yield than government bond.

Zero-Coupon Bond

• It is also known as an “accrual bond” is a debtsecurity that doesn't pay interest (coupon) but istraded at a discount, rendering profit at maturitywhen the bond is redeemed for its full face value.

• The maturity dates on zero coupon bonds are usuallylong term, with many having initial maturities of atleast 10 years.

• It doesn't make regular interest payments or so-called coupons, hence term zero-coupon bond.

Other Types of Bond

• Personal Bond

• High Yield Bond

• Convertible Bond

• Perpetual Bond

• Bearer Bond (unregistered Bond)

• Registered Bond

• War Bond

Cont.….

• Serial Bond

• Revenue Bond

• Sukuk (Islamic Bond)

• Prize Bond

• Development Impact Bond (DIPs)

• Climate Bond

• Covered Bond

• Insurance Bond

Personal Bond

• is a written contract in which a person who has beenarrested agrees to appear at all required court datesand promises to abstain from breaking the law whilethe personal bond is in force. Once the contract issigned, payment of bail is waived, and the arrestedperson is released from jail.

Setting the Personal Bond Amount

• Personal bond is a amount of money set by a judge ormagistrate, required to be paid or agreed upon prior toreleasing a defendant from jail before his or her courthearing date.

• This amount is required to be paid to pretrial servicewithin 7 days of release, or the bond may be revoked.

• The contract for a personal bond includes a provisionthat the defendant is

• Responsible for paying the full amount of the bail forfailing to appear at court when required

Granting a Personal Bond

• The decision to grant a personal bond is based on severalconditions, including the severity of the offense, a priorarrest record, employment history, the number of yearsspent in the community and the presence of familynearby.

• If the defendant has a record of previous arrests, anadded consideration will be whether he appeared at allrequired court dates.

• A personal bond could be approved, for example, for adefendant who's arrested for a first-time offence chargeand poses a minimal flight risk.

Vacating a Personal Bond

• If the defendant attends all required court hearings and meets all of the conditions set for her release, the personal bond will be vacated when the case is closed.

• Under these circumstances, the bond is clear out whether the defendant is found innocent or guilty.

High Yield Bond or Junk Bond

• A junk bond refers to high-yield or noninvestment-grade bonds. Junk bonds are fixed-incomeinstruments that carry a credit rating.

• Junk bonds are so called because of their higherdefault risk in relation to investment grade bonds.

• These bonds have a higher risk and higher yieldwhich attracts to investor.

Risks

• Interest rate risk

• Credit risk

• Duration risk

• Repayment of principal risk

Convertible Bonds

• It is type of bond that the holder can convert into aspecified number of shares of common stock in theissuing company or cash of equal value.

• It has the maturity of greater than 10 years.

• It is a Hybrid security with debt and equity-likefeatures.

• A convertible bond has a coupon rate lower than thatof similar non-convertible debt.

History

• It originated in the mid 19th century and was used by early speculator Jacob Little & Daniel Drew to counter market concerning.

• It is issued by companies with a low credit rating

Advantages of Convertible Bonds

• If Bonds are converted into stocks companies debt vanishes.

• However, in exchange for the benefit of reduces interest payments.

• The value of share holders’ equity is reduced due to the Stock Dilution expected when bond holders convert their bonds into shares.

Perpetual Bond

• It is a bond with no maturity date. Therefore, it may be treated as equity, not as debt .

• Issue pay coupons on the perpetual bonds forever and they do not have to redeem the principal.

• Perpetual bond cash flows are, therefore, those of a perpetuity.

Bearer Bond

• It is an certificate issued without a name of itsholder. In other words, the person who has the papercertificate can claim the value of the bond.

• They are traded like cash.

• Bearer bonds are very risky because they can be lostor stolen.

• Bearer bond in the event of its lost, theft, ordestruction.

• Relief is possible in the case of US public debt.

Registered Bond

• It is a bond whose ownership is recorded by the issuer, or by a transfer agent.

• Interest payments, and the principal upon maturity are sent to registered owner.

• It is alternative to a bearer bond.

• Interest is pay only registered person.

War Bond

• It is bond issued by government to fund military operations during war time. This type of bond has low return rate.

• War bond are often accompanied by appeals to patriotism and conscience.

War Bond HistoryName of Country Bond

Austria & Hungry Austrian War Bond (1915) WWI

Canada Victory Bond (1917) WWI

German Lucian Bernhard Bond (WWI)

UK War-Loan To-Day (WWI)

US Liberty Bond (WWI)

Serial Bond• It is a bond that matures in installments over a period

of time.

• Serial bonds (or installment bonds) describes a bondissue that matures in portions over several differentdates. Instead of facing a large lump-sum principal re-payment at maturity, an issuer can opt to spread theprincipal repayment over several periods.

• Example: Rs. 100,000, 5-years serial bond wouldmature in a Rs. 20,000 annuity over a 5-year interval.

• Bond issues consisting of a series of blocks of securitiesmaturing in sequence the coupon rate can be different.

Revenue Bond

• Revenue bond is issued by a (local) government.

• It is a special type of municipal bond distinguish byits guarantee of repayment.

• Revenue bonds are typically non-recourse, meaningthat in the event of default, the bond holder has noalternative to other governmental asset or revenues.

Purpose

• Revenue bonds may be issued to constant or expand upon various revenue generating entities including:

• Toll Roads and bridges

• Airports, Seaports

• Power Plants

• Prisons

Sukuk (Islamic Bond)• Sukuk is the plural of “Sakk” which means is stamp.

• Islamic bonds, structured in such a way as to generatereturns to investors without infringing Islamic law (thatprohibits riba or interest).

• A sukuk investor has a common share in the ownershipof the assets linked to the investment although this doesnot represent a debt owed to the issuer of bond.

• However, as opposed to conventional bonds, whichmerely confer ownership of a debt, Sukuk grants theinvestor a share of an asset, along with thecommensurate cash flows and risk.

History

• The first officially sukuk wort RM. 125 Million were issued in Malaysia by Shell MDS.

• In 2000, the government of Sudan issued domestic sovereign short-term sukuk worth 77m Sudanese Pounds on the basis of Musharaka.

Prize Bond

• It is also known as a Lottery Bond.

• Funds raised are used to offset governmentborrowing and are refundable to the bond owner ondemand.

• Interest is returned to bond owners via prizes whichare distributed by means of random selection ofbonds. Prize Bonds are also offered in Pakistan.

Cont.…..

• Prize Bonds is gold investment and are bearer type ofsecurity available in the denominations of Rs.200, Rs.750,Rs.1,500, Rs.7,500, Rs.15,000,Rs.25000 and Rs.40,000.

• These bonds are issued in series. Each series consist of oneless than 1,000,000 bonds.

• No fixed return is paid but prize draws are held on quarterlybasis.

• Prize Bond's Scheme is the only lawful source for poor andmiddle class people investment opportunities to becomerich overnight and making their dreams come true Prizebond offers investment options

Prize Bond Rs. 100

Prize Bond Rs. 200

Prize Bond Rs. 700

Prize Bond Rs.1500

Prize Bond Rs. 40,000

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