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Bond Education
Definition of bond
Chapter 1 Definition of bond
Types of Bonds
Issues traded in the market
Chapter 2 How to buy a Bond
How to cash out Bond
Chapter 3 Bond definition Coupon
Maturity
Yield to maturity (YTM)
Duration
Spread
Default
Custodian
Spot date
Chapter 4 Recommendation
What be aware when you invest in Fixed Income Instrument ?
Type of Risks Associated with Bond Investing
Interest rate Risk
Yield Curve Risk
Reinvestment Risk
Credit Risk
Liquidity Risk
Exchange -Rate Risk
Volatility Risk
Inflation Risk
Event Risk


Definition of bond

BOND is a security issued by a borrower that obligates the issuer to make specified payments to the holder over a specific period.


Types of Bonds

Zero Coupon Bond: A Bond carries no coupons and must provide all its return in the form of price appreciation.
Coupon Bond : obligates the issuer to make interest payments called coupon payments over the life of the Bond, then to repay the principal (the Bond's par value) at maturity.
Floating rate bond : A Bond designed to minimize the holder's interest rate risk. The interest rate that the borrower pays is reset periodically depending on market conditions.
Collable bond : A Bond that the issuer may repurchase at a given price in some specified period.


Issues traded in the market

Government Bond : Short-term and Long-term debt issued by Ministry of Finance and managed by the Bank of Thailand.
State Enterprise Bond : Short-term and Long-term debt issued by State Enterprise and managed by the comptroller General Department.
Corporate Bond : Short-term and Long-term debt issued by private corporation typically paying semiannual coupons and returning the face value of the Bond at maturity.
Treasury Bills (T-Bills) : A Short-term zero coupon instruments and provide its return in the form of price appreciation.


How to buy a bond

Primary Market
A government or corporations can market its new issue by offering Bonds publicly to the investing community or placing them privately with a small group of investors.

Secondary Market
The market which financial institutions, banks, and brokers served as intermediaries in the sale of fixed income instruments among investors.


How to cash out bond

Bond owners can sell the Bond to individuals or financial institutions who trade Bonds ( pricing and settlement are agreed upon by buyer and seller).


Coupon

Interest rate on a debt security the issuer promises to pay to the holder until maturity, expressed as an annual percentage of face value.


Maturity

Date on which the principal amount of a note, draft, acceptance, Bond, or other debt instrument becomes due and payable. Also, termination or due date on which and installment loan must be paid in full.


Yield to Maturity (YIM)

Concept used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a Bond, is held to its MATURITY DATE. It takes into account purchase price, REDEMPTION value, time to maturity, COUPON yield, and the time between interest payments.


Duration

The weighted average term to maturity of the cash flows from the Bond, where the weights are the present value of the cash flow.


Spread

Fixed - income securities
1. difference between yields on securities of the same quality but different
maturities. For example, the spread between 10% short-term Treasury bills and 14% long-term Treasury Bonds is 4 percentage points.
2. Difference between yields on securities of the same maturity but different quality. For instance, the spread between a 14% long-term Treasury Bond and a 17% long-term Bond of a B-rated corporation is 3 percentage points, since an investor's risk is so much less with the Treasury Bond.


Default

Failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of a Bond indenture. In the event of default, Bondholders may make claims against the assets of the issuer in order to recoup their principal.


Custodian

Bank or other financial institution that keeps custody of stock certificates and other assets of a mutual fund, individual, or corporate client.


Spot Date

2 working days after trade day.


Interest rate risk

Bond features and price changes
When interest rates change, the price of a fixed-coupon changes in the opposite direction. The value of Bond is the sum of the present value of its fixed future cash flows, discounted at the appropriate current market interest rate. Therefore, when the interest rate increase, a Bond's value drops and vice-versa. Moreover, this relation may be viewed in another way. If interest rates increase after a fixed-coupon rate Bond has been issued, new Bonds would carry an appropriately higher coupon rate in order them to sell at par or face value.

Since the previously issued Bonds carry a fixed but lower coupon rates, they will become unattractive to investors who can earn a higher rate of return or yield on the new Bonds. Therefore, the price of the previously issued Bonds will drop to a point where it matches the return on the new Bond, i.e., the new interest required in the market. The opposite will happen when interest rates drop. The existing Bonds will command a premium over their par value. So the Bondholder loses when the interests rise and the probability of such an occurrence is known as the interest rate risk


Yield curve risk

Shifts in the yield curve of any kind, parallel or twisting are of concern to Bond investors and present a source of uncertainty. The risk associates with yield curve is known as the yield curve risk.


Reinvestment risk

When a Bond investor receives coupon payments, she bears the risk of reinvesting them at rate of return or yield that is lower than the promised yield on the Bond. For example, if interest rates go down across the board, the reinvestment rate will be lower. This is known as reinvestment risk


Credit risk

Credit risk can be divided into three types
Default Risk is defined as the possibility that the issuer will fail to meet its obligations under the indenture.
Credit spread risk (also known as the risk premium or spread) is defined as the excess return above the return on a benchmark, default-free security ( i.e., Treasury securities) demands by investors to compensate them for the risk of buying a risky security. Thus,

Yield on a risk Bond = Yield on a default- free Bond + Risk Premium

Downgrade Risk is the risk that a Bond is reclassified as a riskier security by a credit rating agency. When an issue is recategorized, or its credit rating(downgrade) to a Bond issue, the yield adjusts immediately to reflect the new rating.


Liquidily risk

Liquidity risk represents the likelihood that an investor will be unable to sell the security quickly and at a fair price.


Exchange - Rate risk

When Bond payment, coupon and/or principle, are dominates in a currency other than the home currency of the Bondholder, the investor bears the risk of receiving an uncertain amount when these payments are converted into the home currency.


Volatility risk

The risk in the value of options portfolios due to unpredictable changes in the volatility of the underlying asset.


Inflation risk

Since fixed coupons Bonds pay a constant coupon, increasing prices erode the buying power associate with Bond payment. This is known as inflation risk.


Event risk

Event risk is defined as a risk, which happen beyond your control, such as, political risk, disasters (e.g., hurricanes, earthquakes, or industrial accident)

For more information, please contact email : fi-bond@kgi.co.th (662)-231-1111