CFA Notes - Fixed Income - I

Note

（I）Basic Features of a Bond

i. Definition

Corporations and governments issue bonds and notes. Fixed-income securities with shorter maturities are called "notes", those with longer maturities are called "bonds". All bonds are characterized by the same basic features, including issuer, maturity, par value, coupon and currency.

ii. Issuer

Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.

iii. Maturity

The maturity date of a bond refers to the date when the issuer is obligated to redeem the bond by paying the outstaning principal amount（Pav value）. Maturity typically range from overnight（隔夜） to 30 years or longer.

iv. Par Value（Face Value）

The principal amount is the amount that the issuer agrees to repay the bondholders on the maturity date. This amount is also referred to as the par value, or simply par, face value, nominal value, redemption value, or maturity value. Bonds can have any par value.

v. Coupon

The coupon rate or nominal rate of a bond is the interest rate that the issuer agrees to pay each year until the maturity date. The annual amount of interest payments made is called the coupon.

vi. Currency

Bonds can be issued in any currency. The currency of issue may affect a bond's attractiveness. If the currency is not liquid or freely traded, or if the currency is very volatile relative to major currencies, investments in that currency will not appeal to many investrs. For this reason, borrowers in developing countries often elect to issue bonds in a currency other their local currency, such as in euros or US dollars.

（II）Issuer For Bond

i. Issuer

a. Definition

Many entites are able to issue bonds: such as

1. private individuals；
2. national governments；
3. companies.

Bond issuers are classified into categories based on the similarities of these issuers and their characteristics. Major types of issuers include：

1. Supranational Organizations；
2. Sovereign(National) Governemnts；
3. Non-sovereign(Local) Governments；
4. Quasi-government Entites；
5. Companies

b. Issuer For Bond

ii. Supranational Organizations 超国家组织

a. Definition

Issued by organizations that operate globally.

b. Example

1. World Bank 世界银行；
2. the European Investment Bank 欧洲投资银行；
3. International Monetary Fund 国际货币基金组织

iii. Sovereign(National) Governemnts 主权国家政府

a. Definition

Issued by sovereign state.

b. Example

1. U.S. Treasury Securities；
2. 日本国债；
3. 中国国债；

iv. Non-sovereign(local) Governments 非主权政府

a. Definition

Issued by government entities that are not national government.

b. Example

1. the state of Californial；
2. the city of Toronto

v. Quasi-government Entites 准官方组织

a. Definition

Not a direct obligation of a country's government or central bank.

b. Example

1. Federal National Mortgage Association（FNMA 联邦全国抵押协会）；
2. Freddie Mac 房地美；
3. Frannie Mae 房利美

vi. Companies

Often corporate bonds are dividend into those issued by financial companies and those issued by nonfinancial companies.

vii. Default Risk

风险由低到高排序：

1. Supranational Organizations；
2. Sovereign(National) Governemnts；
3. Non-sovereign(Local) Governments；
4. Quasi-government Entites；
5. Companies

（III）Bonds on Different Locations

i. Domestic Bond

A national bond market includes all the bonds that are issued and traded in a specific country, and denominated in the currency of that country. Bonds issued by entities that are incorporated in that country are called domestic bonds.

ii. Foreign Bond

A national bond market includes all the bonds that are issued and traded in a specific country, and denominated in the currency of that country. Bonds issued by entities that are incorporated in another country are called foreign bonds.

iii. European Bond

Bonds issued and traded on the Eurobond market are called Eurobonds. The Eurobond market was created primarily to bypass the legal, regylatory, and tax constrains imposed on bond issuers and investors, particularly in the United States.

（IV）Common Bonds

i. Commercial Paper

Commercial paper is short-term, unsecured promissory note issued in the public market or via a private placement that represents a debt obligation of the issuer.

ii. Large-denomination Negotiable Certificates of Deposit

A certificates of deposit（CD） is an instrument that represents a specified amount of funds on deposit for a specified maturity and interest rate. CDs are an important source of funds for financial institutions. A negotiable CD allows any depositor（initial or subsequent）to sell the CD in the open market prior to the maturity date.

iii. Repurchase Agreement

A repurchase agreement or repo is the sale of a security with a simultaneous agreement by the seller to buy the same security back from the purchaser at an agreed-on price and future date.

iv. Municipal Debt

A type of non-sovereign bond issued by a state or local goverment in the Uniteed States. It very often（but not always）offers income tax exemptions.

v. Difference among money market instruments

（V）Fixed Rate of Floating Rate Bond

i. Structure of Cask Flow

We can divide bonds into fixed rate bond and floating rate bond according to the structure of coupon payment cash flow.

ii. Fixed Rate Bond

The issuer promise to pays a fixed periodic coupon over a specified time to maturity.e.ge, plain vanilla（香草）bond / conventional bond.

iii. Floating Rate Bond

Some bonds pay periodic interest that depends on a current market rate of interest. These bonds are called floating rate notes(FRN). The market rate of interest is called the reference rate（e.g.LIBOR伦敦银行同业报价）

Almost all FRNs have quarterly coupons.
FRNs may include a floor or a cap:
Floor prevents coupon from falling below a specified minimum rate.
Cap prevents coupon from rising above a specified maximum rate.

iv.

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