cfa一級基礎(chǔ)固定收益

FrameworkofFixedIncome

StudySession15—BasicConcepts

R51Fixed-IncomeSecurities:DefiningElements

R52Fixed-IncomeMarkets:Issuance,Trading,andFunding

R53IntroductiontoFixed-IncomeValuation

R54IntroductiontoAsset-BackedSecurities

StudySession16—AnalysisofRisk

R55UnderstandingFixed-IncomeRiskandReturn

R56FundamentalsofCreditAnalysis

3-200

TopicWeightingsinCFALevelI

2-200

StudySession1

Ethics&ProfessionalStandards

15

StudySession2-3

QuantitativeMethods

12

StudySession4-6

EconomicAnalysis

10

StudySession7-10

FinancialStatementAnalysis

20

StudySession11

CorporateFinance

7

StudySession12

PortfolioManagement

7

StudySession13-14

EquityAnalysis

10

StudySession15-16

FixedIncomeAnalysis

10

StudySession17

DerivativeInvestments

5

StudySession18

AlternativeInvestments

4

Total:

100

),'▁????

FixedIncome

???

??????? ??

BasicFeaturesofABond

Bondholder?????????к???????

Maturitydate:thedateonwhichtheprincipalistoberepaid

Termtomaturity(tenor):thetimeremaininguntilmaturityonceabondhasbeenissued

Moneymarketsecurities:securitieswithmaturitiesatissuance(originalmaturity)ofoneyearorless

Capitalmarketsecurities:securitieswithoriginalmaturitiesthatarelongerthanone

year

Perpetualbonds:havenostatedmaturitydate.,makeperiodicint.paymentbutnopromisetorepaytheprincipal,suchasconsolsissuedbythesovereigngovernmentintheUnitedKingdom,havenostatedmaturitydate

Bondholdersareexposedtocreditrisk:

Issuerfailingtomakefullandtimelypaymentsofinterestand/orrepaymentsofprincipal.

Fromtheissuer'sperspective,aninvestmentgradecreditratinggenerallyallowseasieraccesstobondmarkets,especiallyinconditionsoflimitedcredit,andatlowerinterestratesthandoesanoninvestmentgradecreditrating.

6-200

BasicFeaturesofABond

Issuer/borrower?????????к??????

Supranationalorganizations

IssuedbyorganizationsthatoperategloballysuchastheWorldBank,the

EuropeanInvestmentBank,andtheInternationalMonetaryFund(IMF).

Sovereign(national)governments

AprimeexampleisU.S.Treasurybonds,butmanycountriesissuesovereignbonds.

Nonsovereign(local)governments

Issuedbygovernmententitiesthatarenotnationalgovernments,suchasthestateofCaliforniaorthecityofToronto.

Quasigovernmententities

Notadirectobligationofacountry'sgovernmentorcentralbank.AnexampleistheFederalNationalMortgageAssociation(FannieMae).

Companies(i.e.,corporateissuers)

Dividedintothoseissuedbyfinancialcompaniesandthoseissuedbynonfinancialcompanies

5-200

Framework

Basicfeaturesofabond

Bondindenture

Legalinformation

Collateral

Creditenhancements

Covenants

Tax

Structureofabond’scashflows

Principalrepaymentstructures

Couponpaymentstructures

Bondswithcontingencyprovisions

Callablebonds

Putablebonds

Convertiblebonds

4-200

BondMarket

Domesticbonds:issuedbyafirmdomiciledinacountryandalsotradedinthatcountry’scurrency.

Foreignbonds:Bondssoldinacountryanddenominatedinthatcountry’scurrencybyanentityfromanothercountry(foreigncountry)arereferredtoasforeignbonds.

Eurobonds:issuedoutsidethejurisdictionofanyonecountryanddenominatedinacurrencydifferentfromthecurrencyofthecountriesinwhichtheyaresold.

Registeredbonds:theownershipisrecordedbyeithernameorserialnumber.

Bearerbonds(majorityofformofEurobonds):trusteedoesnotkeeprecordsoftheownershipofthebondssothattheownershipisevidencedbypossessingthebonds.

Moreattractivetothoseseekingtoavoidtaxes.

Globalbonds:Eurobondsthattradeinthenationalbondmarketofacountryotherthanthecountrythatissuesthecurrencythebondisdenominatedin,andintheEurobondmarket.

9-200

BondMarket

Sectorsofthebondmarket

GlobalBondMarket

NationalBondMarket EurobondMarket

Global EurobondsBonds

Domestic Foreign

Bonds Bonds

8-200

BasicFeaturesofABond

Parvalue//facevalue/maturityvalue:?????????1000

Couponrate:????????????

Plainvanillabond/conventionalbond:abondwithfixedcouponrate

Zero-couponbond/purediscountbond:abondpaysnointerestpriortomaturity

Paymentscurrency

Dual-currencybond:makescouponinterestpaymentsinonecurrencyandprincipalrepaymentmaturityinanothercurrency.

Currencyoptionbond:givesbondholdersachoiceofwhichoftwocurrenciestheywouldliketoreceivetheirpaymentsin.

Anexample?

6%couponrate,5yearsmaturesfromtoday,1000facevalue,annualpayments

(howaboutsemi-annualpayments?)

7-200

LegalandRegulatoryIssuesAddressedinATrustDeed

Legalinformationaboutissuingentities

Sovereignbonds:issuedbythetreasuryoftheissuingcountry.

Corporatebonds:issuedbywellknowncorporation,byasubsidiary,orbyaholdingcompany.

Securitizedbonds:issuedbyaseparatelegalentitycreatedforthepurposeofowningspecificassetswhichiscalledspecialpurposeentities(SPEs)inU.S,andspecialpurposevehicles(SPVs)inEurope.

SPVsisbankruptcyremotebecausetheassetscanprovidecashflowstosupportthepaymentofthebondevenifthecompanydefaults.

Thetransferofassetsbythesponsorisconsideredalegalsale;oncetheassetshavebeensecuritized,thesponsornolongerhasownershiprights.

Anypartymakingclaimsfollowingthebankruptcyofthesponsorwouldbeunabletorecovertheassetsortheirproceeds.

Benefitofsecuritization:

Lowersorremovesthewallbetweenultimateinvestorsandoriginatingborrowers.

Securitizationreducesliquidityriskinthefinancialsystem

Securitizationenablesinnovationsininvestmentproducts

12-200

LegalandRegulatoryIssuesAddressedinATrustDeed

Otherlegalandregulatoryissueaddressedinatrustdeedinclude:

Legalinformationabouttheentitiesissuingthebond

Anyassets(collateral)pledgedtosupportrepaymentofthebond.

Anyadditionalfeaturesthatincreasetheprobabilityofrepayment(creditenhancements)

Covenants

Tax

11-200

BasicFeaturesofABond

Trustdeed:legacontracttatescribestheformofthebond,theobligationsofthe

issuer,andtherightsofthebondholders.

IntheUnitedstatesandCanada,itiscalledbondindenture.

Theindentureiswritteninthenameoftheissuerandreferencesthefeaturesofthebondissue,suchas

Theprincipalvalueforeachbond

Theinterestrateorcouponratetobepaid

Thedateswhentheinterestpaymentswillbemade

Thematuritydatewhenthebondswillberepaid

Whetherthebondissuecomeswithanycontingencyprovisions.

Informationregardingthefundingsourcesfortheinterestpaymentand

principalrepayments

Collaterals:assetsorfinancialguaranteesunderlyingthedebtobligationaboveandbeyondtheissuer'spromisetopay.

Creditenhancements:provisionsthatmaybeusedtoreducethecreditriskofthebondissue.

Covenants:Covenantsareclausesthatspecifytherightsofthebondholdersandanyactionsthattheissuerisobligatedtoperformorprohibitedfromperforming.

10-200

LegalandRegulatoryIssuesAddressedinaTrustDeed

Creditenhancement:avarietyofprovisionsusedtoreducethecreditriskofabondissue.

Internalcreditenhancement:

Overcollateralization:thecollateralpledgedhasavaluegreaterthan

theparvalueofthedebtissued

Excessspread:theyieldonthefinancialassetssupportingthedebtis

greaterthantheyieldpromisedonthebondsissued.

Divideabondintotrancheswithdifferentseniorityofclaims:anylossesofassetssupportingasecuritizedbondarefirsabsorbedbythebondswiththelowestseniority,thenthebondswiththenext-lowestpriorityofclaims.——waterfallstructure

15-200

LegalandRegulatoryIssuesAddressedinaTrustDeed

Assetorcollateralbacking:awaytoreducecreditrisk.

Unsecuredbonds:representaclaimtotheoverallassetsandcashflowsofissuer.

Securedbonds:backedbyaclaimtoaspecificassetsofacorporation.

Assetspledgedtosupportabondissuearereferredtocollateral

Unsecuredbondsarepaidaftersecuredbondsintheeventofdefault.

Inmanyjurisdictions,debenturesareunsecuredbonds,withnocollateralbacking

assignedtothebondholders.

Typesofcollateralbacking:

14-200

Typesofbond

Collateralbacking

Collateraltrustbonds

Financialassets

Equipmenttrustcertificates

Specifictypesofequipmentorphysicalassets(e.g.railroadcards,oildrilling)

Mortgagebackedsecurities(MBS)

Mortgageloans

Coveredbond

Asegregatedpoolofassetscalleda“coveredpool”

LegalandRegulatoryIssuesAddressedinATrustDeed

Sourceofrepaymentproceeds:

13-200

Typesofbond

Sourceofrepayment

Supranationalorganizations

repaymentofpreviousloans

paidincapitalfromitsmembers

Sovereignbonds

Taxrevenues

Printmoney

Nonsovereigndebt

Generaltaxingauthorityofissuer

Cashflowsofthefinancedproject(revenues)

Specialtaxesorfees

Corporatebonds

Cashflowsfromoperations

Securitizations

Cashflowsgeneratedbyoneormoreunderlyingfinancialassets.

LegalandRegulatoryIssuesAddressedinaTrustDeed

Negativecovenants:frequentlycostlyanddomateriallyconstraintheissuer'spotentialbusinessdecisions.

Thepurposeofnegativecovenantsistoprotectbondholdersfromsuchproblemsasthedilutionoftheirclaims,assetwithdrawalsorsubstitutions,andsuboptimalinvestmentsbytheissuer.Examplesofnegativecovenantsincludethefollowing:

Restrictionsondebtregulatetheissueofadditionaldebt.

Negativepledgespreventtheissuanceofdebtthatwouldbeseniortoorrankinpriorityaheadoftheexistingbondholders'debt.

Restrictionsonpriorclaimsprotectunsecuredbondholdersbypreventingtheissuerfromusingassetsthatarenotcollateralized(calledunencumberedassets)tobecomecollateralized.

Restrictionsondistributionstoshareholdersrestrictdividendsandotherpaymentstoshareholderssuchassharebuybacks(repurchases).

Restrictionsonassetdisposalssetalimitontheamountofassetsthatcanbedisposedbytheissuerduringthebond'slife.

Restrictionsoninvestmentsconstrainriskyinvestmentsbyblockingspeculativeinvestments.

Restrictionsonmergersandacquisitionspreventtheseactionsunlessthecompanyisthesurvivingcompanyorunlesstheacquirerdeliversasupplementalindenturetothetrusteeexpresslyassumingtheoldbondsandtermsoftheoldindenture.

18-200

LegalandRegulatoryIssuesAddressedinaTrustDeed

AffirmativeVS.negativecovenants

Affirmativecovenants:aretypicallyadministrativeinnature.

Frequentlyusedaffirmativecovenantsincludewhattheissuerwilldowiththeproceedsfromthebondissueandthepromiseofmakingthecontractualpayments.

Theissuermayalsopromiseto

Complywithalllawsandregulations

Maintainitscurrentlinesofbusiness

Insureandmaintainitsassets,andpaytaxesastheycomedue

Thesetypesofcovenantstypicallydonotimposeadditionalcoststotheissueranddonotmateriallyconstraintheissuer'sdiscretionregardinghowtooperateitsbusiness.

bonds

affirmative indenture negativecovenants covenants

money

17-200

LegalandRegulatoryIssuesAddressedinaTrustDeed

Externalcreditenhancement:

Suretybond:issuedbyinsurancecompaniesandareapromisetomakeupanyshortfallinthecashavailabletoservicethedebt.

Bankguarantee:similartosuretybond,themajordifferenceisthatitissuedbyabank.

Letterofcredit:apromisetolendmoneytotheissuingentityifitdoesnothave

enoughcashtomakethepromisedpaymentsonthecovereddebt.

LimitationofExternalcreditenhancement:

whileexternalcreditenhancementsincreasethecreditqualityofdebtissuesanddecreasetheyields,deteriorationofcreditqualityoftheguarantorwillalsoreducethecreditqualityofthecoveredissue.

Suretybonds,bankguarantees,andlettersofcreditexposetheinvestortothirdparty(orcounterparty)risk,thepossibilitythataguarantorcannotmeetitsobligations.

Acashcollateralaccountmitigatesthisconcernbecausetheissuerimmediatelyborrowsthecreditenhancementamountandtheninveststhatamount,usuallyinhighlyratedshorttermcommercialpaper.Becausethisisanactualdepositofcashratherthanapledgeofcash,adowngradeofthecashcollateralaccountproviderwillnotnecessarilyresultinadowngradeofthebondissuebackedbythatprovider.

16-200

CashFlowStructure

Amortizingloan:periodicpaymentsincludebothinterestandsomerepaymentofprincipal.

Fullyamortizing:principalisfullypaidoffwhenthelastperiodicpaymentismade.

Partiallyamortizing:thefinalpaymentincludesjusttheremainingunamortizedprincipalamountatbondmaturity.

21-200

CashFlowStructure

Principalrepaymentstructures

Plainvanillabond/bulletbonds:periodicinterestpaymentsandprincipalispaidatmaturity.

Balloonpayment:thefinalpaymentincludesalumpsuminadditiontothefinalperiod’sinterest.

Example:principal=$1,000,maturity=5years,couponrate=6%,discountrate=6%,annualpayment.

20-200

TaxationofBondIncome

Taxconsideration:

Interestincomepaidtobondholdersistaxedasordinaryincomeatthesamerateaswageandsalaryincome.

Municipaldebtsismostoftenexemptfromfederalincometaxandfromtheincometaxofthestate.

Thetaxstatusofbondincomemayalsodependonwherethebondisissuedandtraded.

Capitalgainorloss:duetosellacouponbondpriortomaturity

Capitalgainsaretaxedatalowerratethanordinaryincome.

LongtermCG:capitalgainsonthesaleofanassetthathasbeenownedformorethantheminimumamountoftime,whichistaxedatanevenlowerrate.

Originalissuediscount(OID)bonds:aportionofthediscountfromparatissuanceistreatedastaxableinterestincomeeachyear.

ThistaxtreatmentalsoallowsthatthetaxbasisoftheOIDbondisincreasedeachyearbytheamountofinterestincomerecognized,sothereisnoadditionalcapitalgainstaxliabilityatmaturity.

Purediscountbonds:aportionofthediscountfromparatissuanceistreatedas

taxableinterestincome.

Premiumbonds:partofthepremiumcanbeusedtoreducedthetaxableportionofinterestpayments.

19-200

CashFlowStructure

Advantagesanddisadvantagesofsinkingfundprovision

Advantages:lesscreditriskduetotheperiodicredemptionsoftheprincipal

Disadvantages:morereinvestmentrisk.wheninterestratedecreases,themarketpriceisgreaterthantheredemptionprice

First,investorsfacereinvestmentrisk,theriskassociatedwithhavingtoreinvestcashflowsataninterestratethatmaybelowerthanthecurrentyieldtomaturity.

Iftheserialnumberofaninvestor'sbondsisselected,thebondswillberepaidandtheinvestorwillhavetoreinvesttheproceeds.Ifmarketinterestrateshavefallensincetheinvestorpurchasedthebonds,heorsheprobablywillnotbeabletopurchaseabondofferingthesamereturn.

Anotherpotentialdisadvantageforinvestorsoccursiftheissuerhastheoptionto

repurchasebondsatbelowmarketprices.

Forexample,anissuercouldexerciseacalloptiontobuybackbondsatparonbondspricedabovepar.Inthiscase,investorswouldsufferaloss.

24-200

CashFlowStructure

Sinkingfundarrangement:

Originally,asinkingfundwasaspecifiedcashreservethatwassegregatedfromtherestoftheissuer'sbusinessforthepurposeofrepayingtheprincipal.

Moregenerallytoday,asinkingfundarrangementspecifiestheportionofthebond'sprincipaloutstanding,perhaps5%,thatmustberepaideachyearthroughoutthebond'slifeorafteraspecifieddate.

Typically,theissuerwillforwardrepaymentproceedstothebond'strustee.Thetrusteewilltheneitherredeembondstothisvalueorselectbylotterytheserialnumbersofbondstobepaidoff.

Anothertypeofsinkingfundarrangementoperatesbyredeemingasteadilyincreasingamountofthebond'snotionalprincipal(totalamount)eachyear

Anothercommonvariationisforthebondissuetoincludeacallprovision.Theissuercanusuallyrepurchasethebondsatthemarketprice,atpar,orataspecifiedsinkingfundprice,whicheveristhelowest.

Thebondstoberetiredareselectedatrandombasedonserialnumbertoallocatetheburdenofthecallprovisionfairlyamongbondholders.

Theissuercanrepurchaseonlyasmallportionofthebondissue.

Someindentures,however,allowissuerstouseadoublingoptiontorepurchasedoubletherequirednumberofbonds.

23-200

CashFlowStructure

Thesinkingfundprovisionisusedtoreducethecreditriskoftheissuer.

Sinkingfundprovision:requirestheissuertoretireaportionofabondissueatspecifictimesduringthebonds’life.

Theremaybeaperiodduringwhichnosinkingfundredemptionsaremade.

Theamountofredemptionscoulddecline/increaseeachyear.

Doublingoption/acceleratedsinkingfund:allowcompanytoredeemtwicethe

amountrequiredbythesinkingfundprovision.

Example:

ABCInc.issuea10yearbondwithaparvalueof$100million.

Thebondhasasinkingfundprovision,whichrequiresthatABCInc.retire$20millionoftheprincipaleveryyearbeginninginthesixthyear.

Year0 1 ? 5 6 7 8 9 10

SinkingFundPayment($million) 20 20 20 20 20

Retirementof$100millionprincipal

22-200

CashFlowStructure

Thecouponratedeterminedatthecouponresetdateistheratethattheissuerpromisestopayatthenextcoupondate.

Thenew1-yearrateatthattimewilldeterminetherateofinterestpaidattheendofthenextyear.Mostfloaterpayquarterlyandarebasedonaquarterly(90-day)referencerate.

Example:couponrate=1-yearLIBOR+0.75%,if1-yearLIBORis2.3%atthebeginningoftheyear,thebondwillpay2.3%+0.75%=3.05%ofitsparvalueattheendoftheyear.

Thereferenceratemustmatchthefrequencywithwhichthecouponrateonthebondisreset.

Example:abonddenominatedineuroswithacouponratethatisresettwiceeachyearmightuse6-montheuroLIBORasareferencerate.

27-200

CashFlowStructure

ouponpaymensrucures

Floating-RateNotes(FRN) Couponrate= +Coupon

Rate

quotedmargin Suchas: Itisaconstantvalue.

LIBOR; Itisoftenquotedin

U.S. basispoint.

referencerate Treasury Occasionally,the

yield spreadisnotfixe,

T calledvariablerate

note.

ThemostwidelyusedreferencerateforfloatingratebondsistheLondonInterbankOffer

Rate(LIBOR).

LIBORarepublisheddailyforseveralcurrenciesandformaturitiesofoneday(overnightrates)tooneyear.

Thereisnosingle“LIBORrate”butratherasetofrates,suchas“30dayU.S.dollarLIBOR”or“90daySwissfrancLIBOR”.

Theinterbankofferedratesarealsousedasreferenceratesforotherdebtinstrumentsincludingmortgages,derivativessuchasinterestrateandcurrencyswaps,andmanyotherfinancialcontractsandproducts.

26-200

CashFlowStructure

Couponpaymentstructures

Floating-ratenotes

Deferredcouponbonds

Step-upcouponbonds

Credit-linkedcouponbonds

Payment-in-kindcouponbonds

Index-linkedbonds

25-200

CashFlowStructure

Step-upcouponbonds:haveacouponratethatincreasesovertime.

Haveacalloptionthatallowsthefirmtoredeemthebondissueatasetpriceateachstep-update.

newhighercouponrate>marketyieldofthecallprice callthebonds

Anincreaseinbondcouponratescanbeviewedasaprotectionagainsttheincreaseinmarketinterestrateswhichisduetothedecreaseinissuer’screditrating.

30-200

CashFlowStructure

Variable-ratenote:thequotedmarginabovethereferencerateisnotfixed.

Inversefloaters(alsocalledreversefloaters)havecouponratesthatmoveintheoppositedirectionfromthechangeinthereferencerate.

Whenthereferencerateincreases,thecouponratedecreasesandviceversa.

Example:Aninversefloater’scouponrate=15%2h(3monthLIBOR).

Supposethe3monthLIBORis3%,thenthecouponrateforthenextinterestpaymentperiodis:Couponrate=15%2h3%=9%

29-200

CashFlowStructure

28-200

CashFlowStructure

Differentstructureofinflationindexbonds:

Indexannuitybonds:fullyamortizingwiththeperiodicpaymentsdirectlyadjustedforinflationordeflation

Indexedzerocouponbonds:thepaymentatmaturityisadjustedforinflation.

Interestindexedbonds:couponrateisadjustedforinflationwhiletheprincipal

valueremainsunchanged.

Capitalindexedbonds:couponrateremainsconstant,andprincipalvalueisincreasedbytherateofinflation.E.g.TreasuryinflationProtectedSecurities(TIPS)

TIPS:paysemiannualcoupons,atmaturity:

Ifadjustedparvalue(perbond)isgreaterthan$1,000atmaturity,theholderreceivestheadjustedparvalueasthematuritypayment.

Iftheadjustedparvalueislessthan$1,000(duetodeflation),holdersreceive$1,000atmaturityasthisistheminimumrepaymentamount.

33-200

CashFlowStructure

Creditlinkedcouponbond:couponratewillgoup(down)byacertainamountifthecreditratingoftheissuerfalls(improves).

Payinkind(PIK)bond:allowstheissuertomakethecouponpaymentbyincreasingtheprincipalamountoftheoutstandingbonds,essentiallypayingbondinterestwithmorebonds.

Thesebondshavehigheryieldsbecauseofalowerperceivedcreditqualityfromcashflowshortfallsorhighleverageoftheissuingfirm.

Equitylinkednotes(ELN):noperiodicinterestpayments,andthepaymentatmaturityisbasedonanequityindex.

Indexlinkedbond:couponpaymentsand/oraprincipalvaluethatisbasedonacommodityindex.

Inflationlinkedbonds/linkers:paymentsarebasedonthechangeinaninflationindex,e.g.CPI

Ifitwillnotpaylessthantheiroriginalparvalueatmaturity,evenwhentheindexhasdecreases,whichiscalledprincipalprotectedbonds

32-200

CashFlowStructure

Deferredcouponbonds/splitcouponbond:interestpaymentsaredeferredforaspecifiednumberofyears.

financingforafirmfinancingalargeprojectthatwillnotbecompletedandgeneratingrevenueforsomeperiodoftimeafterbondissuance.

Havetaxadvantagesinsomejurisdictions

Zero-couponbonds:noperiodiccouponpayments;alwaysbetradedatadiscount——onetypeofdeferredcouponbond

31-200

BondswithEmbeddedOptions

Ifinterestratesfall

Issuercanretirethebondpayinghighcouponrate,andreplaceitwithlowercouponbonds.

Whenthebondiscalled,theproceedscanonlybereinvestedatalowerinterestrate.

Threestylesofexerciseforcallablebonds:

Americanstyle:canbecalledanytimeafterthefirstcalldate.

Europeanstyle:canonlybecalledonthecalldatespecified.

Bermudastyle:canbecalledonspecifieddatesafterthefirstcalldate,oftenoncouponpaymentdates.

36-200

BondswithEmbeddedOptions

Callprovisionsarebeneficialtotheissuer.

Callablebondoffersahigheryield(lowerprice)thanidenticalnoncallablebond

Valuecallablebond=valueofidenticalnoncallablebondcalloptionvalue

Deferredcall:callprovisionshaveadefermentperiod;thatis,theissuermaynotcallthebondforanumberofyearsuntilaspecifiedfirstcalldateisreached.

Callprice:thepriceatwhichtheissuermayretirethebond.

Callpremium:theamountbywhichthecallpriceisabovepar.

Firstparcalldate:thedateatwhichtheissueisfirstcallableatparvalue

Example: CallPrice

A20yearbondwasissuedon2/1/2005.

Thefirstcalldateis2/1/2010,andthecall ParValue

priceis$105. Firstparcalldate

Then,thecallpricedeclinesby$1ayeartillit

reaches$100on2/1/2015(thefirstparcalldate). 2/1/05? ? Year

2/1/102/1/15

35-200

Example

Considera$1,000parvalueTIPSwitha10%couponrate.TheCPIforthefirsthalfyearis3%,andtheCPIforthesecondhalfyearis4%(both3%and4%areannualrates).

Coupon1$1(11.5%)1 $0

Coupon2$1000(1. $1.77

34-200

BondswithEmbeddedOptions

Convertiblebondsarebeneficialtothebondholders.

Keytermsofconversionprovision:

Conversionprice:sharepricewhentheconvertiblebondcanbeconvertedintoshares.

Conversionratio:thenumberofcommonshareseachbondcanbeconvertedinto.

Conversionratio=parvalue/conversionprice

Conversionvalue:valueofconversionbondifconvertedrightnow.Conversionvalue=currentshare*conversionratio

Conversionpremium:differencebetweentheconvertiblebond’spriceandconversionvalue

Conversionparity:

Atparity:conversionvalue=convertiblebond’spriceAboveparity:conversionvalue>convertiblebond’spriceBelowparity:conversionvalue<convertiblebond’sprice

39-200

BondswithEmbeddedOptions

Putablebondsarebeneficialtothebondholders.

Putablebondshavealoweryieldandhigherpricethansimilarnon-putablebonds.

Valueofputablebonds=valueofanidenticalnonputablebonds+putoptionvalue.

Ifinterestratesrise

Thebondholderscansellthebondbacktotheissuerandgetcash.

Whenthebondisput,theproceedscanbereinvestedatahigherinterestrate.

38-200

BondswithEmbeddedOptions

Make-wholecallprovision:thecallpriceisnotfixedbutincludesalump-sumpaymentbasedonthepresentvalueofthefuturecouponsthebondholderwillnotreceiveifthebondiscalledearly,whichisunlikelytobelowerthanthemarketvalueofthebond

Toavoidthehigherinterestratesrequiredonacallablebondsbutstillpreservetheoptiontoredeembondearly.

Make-wholeprovisiondoesnotputanupperlimitonthebondvaluewheninterestratesfall.

37-200

Example:

AssumethataconvertiblebondissuedintheU.S.hasaparvalueof$1,000,000andiscurrentlypricedat$1,100,000.Theunderlyingsharepriceis$40,000andtheconversionratiois25:1.Theconversionconditionforthisbondis:

Parity

Aboveparity

Belowparity

Answer:C

Theconversionvalueofthebondis$40,000×25=$1,000,000.Thepriceoftheconvertiblebondis$1,100,000.Thus,theconversionvalueofthebondislessthanthebond’sprice,andthisconditionisreferredtoasbelowparity.

Belowparity:conversionvalue<convertiblebond’sprice

42-200

BondswithEmbeddedOptions

Generally,earlyconversionwouldeliminatetheyieldadvantageofcontinuingtoholdtheconvertiblebond;investorswouldtypicallyreceiveindividendslessthantheywouldreceiveincouponpayments.Forthisreason,itiscommontofindconvertiblebondsthatarealsocallablebytheissueronasetofspecifieddates.

Iftheconvertiblebondincludesacallprovisionandtheconversionvalueisabovethecurrentshareprice,theissuermayforcethebondholderstoconverttheirbondsintocommonsharesbeforematurity.

Forthisreason,calla