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Administrative Studies
ADMS 4501
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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. Bond Characteristics - Coupon 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 $1,000. - 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 issuer. 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 retirement. o Sinking fund (random vs. negotiation). o Conversion. The Global Bond Market Structure - Bond ratings o Most corporate and municipal bonds are related by one or more of the rating agencies. 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 o Canada  T-bills, notes, bonds.  Real return bonds (RRBs) – CPI indexed bonds.  Canada savings bonds (CSBs). o Japan  Medium term, long term, super long term. o United Kingdom  Short gilts, med
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