Advanced Portfolio Management
ADMS 4501 – Winter 2012 – Lois King
Lecture 10 – Chapter 11 – Bond Fundamentals – Mar 15
Basic Feature of a Bond
- Bonds are fixed income securities.
o Pay a fixed amount of interest periodically to the holder of record.
o Repay a fixed amount of principal at the date of maturity.
- Bond market is divided by maturity
o Money market – short-term issues that mature within 1 year.
o Notes – intermediate-term issues that mature between 1 and 10 years.
o Bonds – long-term obligations with maturity greater than 10 years.
o Determine the periodic interest income.
- Term of maturity
o Term bond or serial bond.
- Principal value
o Different from market value and the common principal or par value is
- Type of ownership
o Bearer bonds – no registration of ownership; coupons are clipped and
sent to issuer for payment.
o Registered bonds – pay interest to owners on record.
- Types of issues
o Secured (senior) bonds – backed by alegal claim on a specific asset of the
o Unsecured bonds (debentures) – backed by a general promise to repay
(secured only by general credit of issuer).
o Subordinated (junior) debentures – claim on income and assets which is
subordinate to other debentures.
- Indenture provisions
o The indenture is the contract between the issuer and the bondholder
specifying the issuer’s legal requirements.
- Features affecting a bond’s maturity
o Callable (call premium) vs. non-callable.
o Deferred call.
o Non-refunding provision – some protection against a call and early
o Sinking fund (random vs. negotiation).
The Global Bond Market Structure - Bond ratings
o Most corporate and municipal bonds are related by one or more of the
o The exceptions are very small issues and bonds from certain industries,
such as bank issues. These are known as non-rated bonds.
o Two major rating agencies in Canada.
Dominion bond rating service (DBRS).
Standard and poor’s rating direct Canada.
Types of Bond Issues
- Domestic government bonds
T-bills, notes, bonds.
Real return bonds (RRBs) – CPI indexed bonds.
Canada savings bonds (CSBs).
Medium term, long term, super long term.
o United Kingdom
Short gilts, med