Fixed-Income Instrument Features Summarized

Fixed-Income Instrument Features

Introduction

• Overview of fixed-income instruments and legal contracts governing them.

Features of Fixed-Income Securities

• Represents debt agreements where issuers borrow money from investors.
• Basic features include:
  • Issuer: Categories: supranational, sovereign, quasi-government, corporate.
  • Maturity: Date bond is repaid; classifications:
  • Money market security (≤ 1 year).
  • Capital market security (> 1 year).
  • Par Value: Principal repaid at maturity.
  • Can trade at premium, discount, or par.
  • Coupon Rate and Frequency: Interest paid annually; types include:
  • Plain vanilla, floating-rate bonds, zero coupons.
  • Seniority Ranking: Determines payment order in defaults.
  • Contingency Provisions: Clauses for actions under specific conditions.

Yield Measures

• Current Yield: Annual coupon divided by bond price.
• Yield to Maturity (YTM): Internal rate of return on bond’s cash flows.
  • Price inversely related to yield.

Bond Indentures and Covenants

• Legal agreements detailing terms, obligations, rights, and repayment sources.
• Covenants:
  • Affirmative: Obligations of issuer.
  • Negative: Restrictions on issuer actions.

Yield Curves

• Charts YTMs against maturity, reflecting compensation for risk.
• Used to evaluate credit risk by comparing yield curves.

Conclusion

• Understanding fixed-income features essential for identifying investment opportunities and assessing risks.