fixed-income securities 01a intro s
TRANSCRIPT
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EQuity Consulting
Ronald K. CHUNG, Ph.D.EQuity Consulting Co. Ltd.
[email protected] [email protected]
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Fixed-income Securities
Introduction
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General Course Info.
Lectures
• Thurs, 15:30 – 18:30
Assessments
• Class participation and discussion 10%• Exercise 20%
• Mid-term test 30%
• Final 40%
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Resources
Textbook
• Martellini, Lionel, P. Priaulet and S. Priaulet, Fixed-income
Securities, latest ed.
Reference
• Fabozzi, Frank J., Bond Markets, Analysis and Strategies,
latest ed.
Also• Tuckman, Bruce, Fixed Income Securities: Tools for Today’s
Markets, latest ed.
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Ch. 1 Bonds and Money-Market Instruments
Fixed-income markets
Bonds
MM
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Fixed Income Market
S/T (MM) v. L/T
Loans vs. Negotiable (Secondary markets for Bills,
Notes, Bonds)
Issuers
Fixed Income Derivatives (e.g., Collateralized ABS )
Domestic v. Global
• Asia (Ex-JP): Financial center w/o F.I.?
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Domestic v. International
Euro bond
Bulldog bond
Dragon bond (USD in Asia)
Kangaroo bond
Maple bond
Panda bond
Samurai bond
Dim Sum bond
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Dim Sum Anyone?
• Oct 2010… bonds,
denominated in CNY andissued in HK (thus the
unofficial name), represent a
tiny portion of China's total
local-currency debt. Theamount raised so far this
year is a mere $1.46 billion,
versus the $144.7 billion worth
of yuan debt issued inside
mainland China, according
to Dealogic.
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Definition of a Bond
A financial claim by which the issuer (borrower) is
committed to paying back to the bond holder
(lender,) the amount borrowed (principal), plus
periodic interests (coupon) during a given period oftime (prior to maturity.)
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Definition
A standard bond is…
a fixed-coupon bond without any embedded
option, delivering
• its coupons (type – fixed v. float, step up? Frequency)• on periodic dates and principal
• on the maturity date.
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Key Terminologies
Issuer’s
• Name,
• Type (p. 3 – 4)
(e.g., gov’t, munis,agencies, institutions,
corp.)
• Domicile (v. currency)
• Guarantee
• Rating
Trading
• Issued v. outstanding
• Min amt / increment
• Par (v. redemption)• Price: Issuance v.
Quoted / Yield calc.
• Day count…accrual, settlement
…first coupon date
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Issuers
Government
• Treasury (US, EU, UK, JP)
• Agencies
Munis
Corporates
• Institutions
• Firms
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Moody’s S&P Fitch D&P Brief Definition
Investment Grade: High Creditworthiness
Aaa AAA AAA AAA Gilt edge, prime, maximum safety
Aa1 AA+ AA+ AA+
Aa2 AA AA AA Very high grade, high quality
Aa3 AA- AA- AA-
A1 A+ A+ A+
A2 A A A Upper medium grade
A3 A- A- A-
Baa1 BBB+ BBB+ BBB+
Baa2 BBB BBB BBB Lower medium grade
Baa3 BBB- BBB- BBB-
Distinctly Speculative: Low Creditworthiness
Ba1 BB+ BB+ BB+
Ba2 BB BB BB Low grade, speculative
Ba3 BB- BB- BB-
B1 B+ B+ B+
B2 B B B Highly speculative
B3 B- B- B-
Predominantly Speculative: Substantial Risk or in Default
CCC+
Caa CCC CCC CCC Substantial risk, in poor standing
CCC-
Ca CC CC May be in default, extremely speculative
C C C Even more speculative than those above
CI CI = Income bonds; no interest is being paid
DDD Default
DD DD
D D
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Sector Breakdown of US IG Index
Market Weight (%)
Treasury 25.81
Government sponsored 12.06
• Agency 11.06
• Supranational 1.00
Collateralized 36.96
• Mortgage 36.13
• Asset-backed 0.83
Credit 25.16
• AAA/AA 4.93
• A 11.48
• BBB 8.74
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Non Standard Bonds
Strips
• Separate Trading of Registered Interest and Principal
• Coupon strips v. Principal strips
Floating Rates
• FRN:
coupon rate indexed on S/T ref. rate (e.g., 3 mo LIBOR)
• Variable- / Adjustable- rate bonds :
coupon rate indexed on L/T ref. rate (e.g., 10 y CMT)
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Example: Inflation-Indexed Bonds
Real coupon (RC), adjusted with
• Inflation index = CPI(t+1) – CPI(t)
• Daily inflation reference, DRI
CPI(m-3) +
[(Actual AI days – 1) / Total days in mo] * [CPI(m-2) – CPI(m-1)]
Inflation adjusted Coupon
• Par x RC x [DIR(t) / DIR(0)]
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HK’s inflation linked I-Bond (2011)
A new investment tool is now available in Hong Kong: Hong Kong
Government is going to issue its first retail government bond, an inflation-linked iBond with life span of 3 years (Full name: HK$ Retail Bonds due 2014)
on July 28 and then list (Stock Code: 4208.hk) it on the Hong Kong Stock
Exchange (HKEx stock code: 388.hk) the following day on July 29.
Interest payments of the iBond will be paid semiannually (January 28 and
July 28 each year), with the floating annual interest rate based on the local
Composite Consumer Price Index (CCPI) Moving Average for the six most
recent months, and a minimum guaranteed interest rate set at +1%
annually. No interest payment, however, can be further re-invested intothe iBond. The H.K. iBond is basically tax-free, and also exempt from stamp
duty fee.
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Exercise
ID the key features on the bonds below
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Figure 1.3
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Case: Shimao (Mar. 1, 2011)
SINGAPORE — Shimao Property Holdings Ltd. reduced the size of an intended international dollar bond issue, amid a slew of
recent issuance from China's real-estate sector.
The property developer now is seeking to price a $350 million dollar bond to yield 10.875% to 11%, compared with initialguidance of 11%. It had hoped to raise up to $500 million via the planned seven-year bond, which would be callable after
four years, the people said.
The downsizing of the proposed deal and a rally in prices of Chinese property bonds helped orders increase to more than $575
million by late afternoon in Asia, one of the people said.
It plans to use proceeds to finance the redemption of maturing floating-rate notes, repay other debts, fund development
projects and for general corporate purposes.
S&P’s Ratings Services assigned a speculative BB- rating to Shimao's proposed dollar bond, matching the rating on the
developer's outstanding notes. Even so, it is a notch lower than Shimao's corporate credit rating on the view that offshore
noteholders would be materially disadvantaged compared with onshore creditors if the company were to default.
But S&P downgraded the outlook on the company's BB rating to negative on concerns that the China-based developer's credit
ratios could deteriorate.
"In our view, Shimao's key metrics and financial flexibility could weaken, given its aggressive debt issuance and expansion," said
Frank Lu, an S&P credit analyst.
The property firm's ratio of debt to earnings before interest, taxes, depreciation and amortization likely hovered around five at
the end of 2010, S&P's trigger for a ratings cut, and probably will be even higher by the end of this year, he said.
Moody's rates the proposed bond at B1, in line with the international dollar bonds the company sold in July, a term sheet for the
planned deal showed. The agency rates the corporate at Ba3, the equivalent of a notch below S&P.