bond and its types
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The document provides an extensive overview of bonds, including their definition, history, types, and features. It categorizes bonds into various types such as government, municipal, corporate, and others, each serving specific purposes and carrying different risks and benefits for investors. Key elements discussed include bond classification, issuance processes, and the significance of bonds in funding as well as investment opportunities.
bond and its types
- 4. Members • Atta Hussain 2k14/com/26 • Sanjay Kumar 2k14/com/93 • Sajjad Bhurgri 2k14/com/88 • Unsa Soomro 2k14/com/116 • Kanwal Soomro 2k14/com/55 • Kiran Soomro 2k14/com/57
- 5. Outline • Introduction to Bond • History of Bond • Features of Bond • Classification of Bond • Major Types of Bond • Other Types of Bond • Difference Between Bond and Debenture Bond and Share Bond and Loan
- 6. Introduction to Bond • A bond is a debt instrument issued by governments, corporations and other entities for raise funds. Definition • A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
- 7. Definition • A bond is written and signed promise to pay a certain sum of money on a certain date. • A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
- 8. How Bonds Work ?
- 9. History of Bond • Bonds have been around for thousands of years, dating back to as far as 2400 BC. • Throughout the centuries, the use of bonds has grown exponentially, with both governments and companies using these securities for crucial funding.
- 10. The First Bond Ever 2400 B.C. • The first recorded bond in history dates back to 2400 B.C. – a stone discovered at Nippur, in Mesopotamia, now present-day Iraq. • This particular bond guaranteed the payment of grain by the principal and the surety bond guaranteed reimbursement if the principal failed to make payment. Corn was the currency of that time period.
- 11. Fast Forward: Venetians Create Advanced Bond Markets • During the 1100s, Venice began issuing government bonds to fund its wars, known as the Presiti. • The city continued to evolve its bond market throughout the 14th century, when denizens of Venice could purchase and trade government securities, which paid the owner an endless annuity at a set rate.
- 12. BOND’s
- 13. Feature of Bond • Principal/Nominal/Par/Face-value • Maturity • Coupon/Interest • Credit Quality • Embodied Options
- 14. Classification of Bonds • Secure and Unsecure • Term bond , Serial Bond and Callable Bond • Convertible and Non-Convertible • Registered and Un-Registered or Bearer Bond • Commodity Backed (Bond is not backed by cash)
- 15. Parties Involves in Bond • Issuer • Investment Bank? Underwriter • Investor
- 16. Benefits of Investment in Bonds • Diversification “don’t put all your eggs in one bucket”.
- 17. Cont.…. • Security • Lower Initial Investment Requirements
- 18. Major Types of Bonds Bond Government Bond Municipal Bond Corporations Bond Zero-Coupon Bond
- 19. Government Bond
- 20. Cont.… • It is also known as Treasury Bond. • It is issued by a national government, generally with a promise to pay periodic interest payment and to repay the face value on the maturity date. • They are usually denominated in the country's own currency. • It is safest bond with the lowest interest rate.
- 21. History • The first ever bond issued by a national government was issued by the Bank of England in 1694 to raise money to fund a war against France.
- 22. Govt: Bonds Issued by Govt: of Pakistan • Pakistan Investment Bond (PIB) • US Special Dollar Bond • Wapda Bond • National Saving Bond (Prize Bond) and • Sukuk
- 23. Municipal Bond • A bond issued by state or local government or any of there agencies. Interest from these bonds is generally tax-free to residents but in some cases, interest is federally taxable. • It is generally used to finance Public Project such as roads, schools, airports and seaports and infrastructure related. • It is secured by specific revenue • The interest receives holder of municipal bond is often exclude from income tax.
- 24. Potential Issuers • States/Counties • Cities • Development Agencies (Capital Development Authority CDA) (Karachi Development Authority KDA) • Other Govt: Agencies WAPDA
- 25. History of Municipal Bond • Early days (1800s), Officially the first recorded municipal bond was a general obligation bond issued by the City of New York for a canal in 1812. • The debt was used to finance both urban improvements and a growing system of free public education.
- 26. Municipal Bond Issuance Process • Fiscal Strengthening and Capital Investment Planning • Credit Rating • Project Development • Financial Structuring • Financial Structuring • Authorization of the Prospectus • Marketing to Investors • Preparation • Completion of the Transaction
- 27. Corporate Bond • A bond which is issued by a corporation in order to raise financing for a verity of reasons, such as to ongoing operations or to expend business. • The term is usually applied to longer term debt instrument, with maturity of least one year. • Corporate debt instrument with maturity shorter than one year are referred as a commercial paper.
- 28. Trading • Corporate bonds trade in decentralized, dealer- based, over the counter markets. • Corporate bonds sometimes listed on stock exchanges those bonds are called Listed bonds. • Vast majority of trading volume happens O.T.C.
- 29. Risk Analysis • Compared to government bonds, corporate bonds generally have a higher risk. • Corporate bond holders are stated for this risk by receiving a higher yield than government bond.
- 30. Zero-Coupon Bond • It is also known as an “accrual bond” is a debt security that doesn't pay interest (coupon) but is traded at a discount, rendering profit at maturity when the bond is redeemed for its full face value. • The maturity dates on zero coupon bonds are usually long term, with many having initial maturities of at least 10 years. • It doesn't make regular interest payments or so- called coupons, hence term zero-coupon bond.
- 31. Other Types of Bond • Personal Bond • High Yield Bond • Convertible Bond • Perpetual Bond • Bearer Bond (unregistered Bond) • Registered Bond • War Bond
- 32. Cont.…. • Serial Bond • Revenue Bond • Sukuk (Islamic Bond) • Prize Bond • Development Impact Bond (DIPs) • Climate Bond • Covered Bond • Insurance Bond
- 33. Personal Bond • is a written contract in which a person who has been arrested agrees to appear at all required court dates and promises to abstain from breaking the law while the personal bond is in force. Once the contract is signed, payment of bail is waived, and the arrested person is released from jail.
- 34. Setting the Personal Bond Amount • Personal bond is a amount of money set by a judge or magistrate, required to be paid or agreed upon prior to releasing a defendant from jail before his or her court hearing date. • This amount is required to be paid to pretrial service within 7 days of release, or the bond may be revoked. • The contract for a personal bond includes a provision that the defendant is • Responsible for paying the full amount of the bail for failing to appear at court when required
- 35. Granting a Personal Bond • The decision to grant a personal bond is based on several conditions, including the severity of the offense, a prior arrest record, employment history, the number of years spent in the community and the presence of family nearby. • If the defendant has a record of previous arrests, an added consideration will be whether he appeared at all required court dates. • A personal bond could be approved, for example, for a defendant who's arrested for a first-time offence charge and poses a minimal flight risk.
- 36. Vacating a Personal Bond • If the defendant attends all required court hearings and meets all of the conditions set for her release, the personal bond will be vacated when the case is closed. • Under these circumstances, the bond is clear out whether the defendant is found innocent or guilty.
- 37. High Yield Bond or Junk Bond • A junk bond refers to high-yield or noninvestment- grade bonds. Junk bonds are fixed-income instruments that carry a credit rating. • Junk bonds are so called because of their higher default risk in relation to investment grade bonds. • These bonds have a higher risk and higher yield which attracts to investor.
- 38. Risks • Interest rate risk • Credit risk • Duration risk • Repayment of principal risk
- 39. Convertible Bonds • It is type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. • It has the maturity of greater than 10 years. • It is a Hybrid security with debt and equity-like features. • A convertible bond has a coupon rate lower than that of similar non-convertible debt.
- 40. History • It originated in the mid 19th century and was used by early speculator Jacob Little & Daniel Drew to counter market concerning. • It is issued by companies with a low credit rating
- 41. Advantages of Convertible Bonds • If Bonds are converted into stocks companies debt vanishes. • However, in exchange for the benefit of reduces interest payments. • The value of share holders’ equity is reduced due to the Stock Dilution expected when bond holders convert their bonds into shares.
- 42. Perpetual Bond • It is a bond with no maturity date. Therefore, it may be treated as equity, not as debt . • Issue pay coupons on the perpetual bonds forever and they do not have to redeem the principal. • Perpetual bond cash flows are, therefore, those of a perpetuity.
- 43. Bearer Bond • It is an certificate issued without a name of its holder. In other words, the person who has the paper certificate can claim the value of the bond. • They are traded like cash. • Bearer bonds are very risky because they can be lost or stolen. • Bearer bond in the event of its lost, theft, or destruction. • Relief is possible in the case of US public debt.
- 44. Registered Bond • It is a bond whose ownership is recorded by the issuer, or by a transfer agent. • Interest payments, and the principal upon maturity are sent to registered owner. • It is alternative to a bearer bond. • Interest is pay only registered person.
- 45. War Bond • It is bond issued by government to fund military operations during war time. This type of bond has low return rate. • War bond are often accompanied by appeals to patriotism and conscience.
- 46. War Bond History Name of Country Bond Austria & Hungry Austrian War Bond (1915) WWI Canada Victory Bond (1917) WWI German Lucian Bernhard Bond (WWI) UK War-Loan To-Day (WWI) US Liberty Bond (WWI)
- 47. Serial Bond • It is a bond that matures in installments over a period of time. • Serial bonds (or installment bonds) describes a bond issue that matures in portions over several different dates. Instead of facing a large lump-sum principal re- payment at maturity, an issuer can opt to spread the principal repayment over several periods. • Example: Rs. 100,000, 5-years serial bond would mature in a Rs. 20,000 annuity over a 5-year interval. • Bond issues consisting of a series of blocks of securities maturing in sequence the coupon rate can be different.
- 48. Revenue Bond • Revenue bond is issued by a (local) government. • It is a special type of municipal bond distinguish by its guarantee of repayment. • Revenue bonds are typically non-recourse, meaning that in the event of default, the bond holder has no alternative to other governmental asset or revenues.
- 49. Purpose • Revenue bonds may be issued to constant or expand upon various revenue generating entities including: • Toll Roads and bridges • Airports, Seaports • Power Plants • Prisons
- 50. Sukuk (Islamic Bond) • Sukuk is the plural of “Sakk” which means is stamp. • Islamic bonds, structured in such a way as to generate returns to investors without infringing Islamic law (that prohibits riba or interest). • A sukuk investor has a common share in the ownership of the assets linked to the investment although this does not represent a debt owed to the issuer of bond. • However, as opposed to conventional bonds, which merely confer ownership of a debt, Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risk.
- 51. History • The first officially sukuk wort RM. 125 Million were issued in Malaysia by Shell MDS. • In 2000, the government of Sudan issued domestic sovereign short-term sukuk worth 77m Sudanese Pounds on the basis of Musharaka.
- 52. Prize Bond • It is also known as a Lottery Bond. • Funds raised are used to offset government borrowing and are refundable to the bond owner on demand. • Interest is returned to bond owners via prizes which are distributed by means of random selection of bonds. Prize Bonds are also offered in Pakistan.
- 53. Cont.….. • Prize Bonds is gold investment and are bearer type of security available in the denominations of Rs.200, Rs.750, Rs.1,500, Rs.7,500, Rs.15,000,Rs.25000 and Rs.40,000. • These bonds are issued in series. Each series consist of one less than 1,000,000 bonds. • No fixed return is paid but prize draws are held on quarterly basis. • Prize Bond's Scheme is the only lawful source for poor and middle class people investment opportunities to become rich overnight and making their dreams come true Prize bond offers investment options
- 54. Prize Bond Rs. 100
- 55. Prize Bond Rs. 200
- 56. Prize Bond Rs. 700
- 58. Prize Bond Rs. 40,000
- 59. Ask Question to increase our Knowledge ?
Editor's Notes
- #11: Because the Netherlands did not exist at that time, the bonds issued by the city of Amsterdam are considered their predecessor which later merged into Netherlands government bonds. The average interest rate at that time fluctuated around 20%.
- #14: The name Coupon arose because in the past, paper bond certificates were issued which had coupons attached to them, one for each interest payment. On due dates the holders would hand in the coupon to a bank in exchange for the interest payment. The credit quality of the issue refers to the probability that the bond holders will receive the amount promised at the due dates. For Example: the government is far more secure than corporation or any other bond. Embedded Options: embedded options that give certain rights to the issuer or bondholder. There are two basic options: Call Option: this option gives the issuer the right to redeem the outstanding bond issue at specified dates, and at a specified price, prior to maturity. Put Option: Put option - this option gives the bondholder the right to sell the bond back to the issuer at specified dates, and at a specified price, prior to maturity.
- #16: How Does the Bond-Buying Process Begin? When a corporation or government agency is considering issuing bonds--or stocks, for that matter--it usually contacts an investment bank for advice on the marketplace, the possible issuing price, and other factors. An investment bank is a firm that serves as an intermediary between the organization issuing the securities and the investors who purchase them. The bond issuer itself does not sell the bonds. Investment bankers often begin assisting the corporation or government agency well before the bonds are actually issued. The organization's relationship with the investment banker may continue after the bonds have been issued, and the investment banker may sit on the corporation's board of directors. Corporations and government units realize that investment banks possess knowledge and expertise they need to reach investors. Investment bankers generally have an excellent understanding of capital markets, relevant government regulations, and other factors affecting a bond issue. Many investment bankers also offer broker/dealer services and related financial services. What is the process for issuing bonds? We will look at that next. How Do Investment Bankers Issue Bonds? In acting as an intermediary between the bond issuer and the bond buyer, the investment banker serves as an underwriter for the bonds. When investment bankers underwrite the bonds, they assume the risk of buying the newly issued bonds from the corporation or government unit; they then resell the bonds to the public or to dealers who sell them to the public. The investment bank earns a profit based on the difference between its purchase price and the selling price. This difference is sometimes called the underwriting spread. When the investment bank works with a client corporation or government unit, it generally also prepares required documents for filing with the Securities and Exchange Commission (SEC). It also helps set a price for the issue and takes the lead in forming and managing an underwriting group--also known as a purchase group or syndicate. This syndicate spreads the risk of the new issue to a larger number of participating investment bankers and improves the likelihood of selling all of the newly issued bonds. Sometimes the investment banker markets a new issue but does not underwrite it. The investment bank simply acts as a sales agent under a best efforts agreement, promising to do its utmost to market the bonds. The investment bank has the option to buy the bonds and usually purchases only enough bonds to meet buyer demand, receiving a commission on the bonds sold. After the bond issuer and the investment banker have completed and filed all necessary documents, they can begin to sell the bonds. How Do Issuers and Investment Bankers Locate Bond Buyers? Investment bankers generally have a good understanding of where and how to market newly issued bonds. They may decide, for example, that they can successfully market a certain bond through advertisements in the financial press, including The Wall Street Journal and Barron's. They usually have well-developed investment banking networks and may identify the brokers and sales forces most able to market a particular bond offering. Investment bankers sometimes have established networks with investors who may be interested in the offering; they may encourage the investors to contact brokerage houses, specifying what they want in a bond. Investment bankers also may sell newly issued bonds through private placements to large, institutional investors like insurance companies or government unit retirement funds. If the bonds are purchased for investment and not for resale, they do not need to be registered with the SEC. A bond that is not registered and that may not be sold in the public marketplace is called a letter bond, or letter security, since the purchaser signs a letter stating that the bonds are for investment purposes and not for resale. Regardless of the sales channel, most newly issued bonds are sold through investment bankers.
- #17: BENEFITS OF INVESTMENT IN BONDS Although every bond fund has its own risk, one should be able to balance the risks with the overall benefits of investing in funds associated with bonds. These include: Diversification ‘Never keep all your eggs in one basket’. Diversification means spreading your investments across a broader range of companies as well as industry sectors. This helps in minimizing the risks if the company or sector fails.
- #18: Professional Management Letting the professional money managers to do the heavy lifting for you can save you the hassle of having to research and evaluate the thousands of individual bonds on the market. Lower Initial Investment Requirements Lower investment help assist the accessibility to a wide variety of bonds. The best policy is to work with the investment advisor who can determine your fixed-income needs, find a fund that will help meet those needs, and weigh down the risks associated with it.
- #22: .
- #29: Stands for (over the counter market). Is an electronic stock exchange with the aim of providing an opportunity to small and medium companies to access public funds at low cost.
- #31: Example: lets say a zero coupon bond with a Rs. 1000 par value and 10 years to maturity is trading at Rs 600, you would be paying Rs. 600 today for a bond that will be worth Rs, 1000 in 10 years.
- #41: Credit Rating or Credit Quality: an estimate of the ability of a person or organization to fulfil their financial commitments, based on previous dealings.
- #44: Bearer bonds have been severely curtailed in the US since 19982. Bearer bonds have historically been the financial of choice for Money Laundering, tax evasion, and canceled transaction in general. What is 'Money Laundering' Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.
- #48: Definition: A serial bond is a bond issuance where a portion of the total number of bonds are paid off each year. This results in a gradual decline in the total amount of the issuer's debt outstanding. For example, a $1,000,000, ten-year serial bond will have $100,000 of bonds mature once a year for ten years. A serial bond is designed to support the financing needs of a capital project that delivers a steady stream of funds to pay down the debt over time. For example, a toll road may require initial funding with a bond issuance, after which toll proceeds are used to pay off the bonds over a long period of time. The same situation arises for an apartment complex, where bonds are used to pay for construction of the complex, and the resulting rents are used to pay for the bonds. Conversely, serial bonds are not suitable when the cash flows expected to be generated by a project funded with the bonds will be irregular, delayed, or uncertain. In such cases, structuring a bond as a serial bond could result in a default rather early in the buy-back period. The advantage to the issuer of a serial bond is that less interest will be paid over the life of the bonds, since the aggregate amount of cash loaned to the issuer is greatly reduce. The advantage to the investor is the reduced risk of default, since the issuer's repayment liability is constantly declining.
- #51: Sukuk is common in Islamic finance and is the Arabic term for financial certificates. It is the equivalent of bonds, which are common in the western world. Since earning interest is not allowed in Islam, Sukuk bonds are structured to fulfill Islamic law, which prohibits charging and paying interest. If a financial instrument complies with Islamic law, it can be categorized in accordance with its tradability and non-tradability in secondary markets. Sukuk Example: Sukuk bonds are structured in a manner where the issuer of the Sukuk sells the financial certificate to the investor, who in turn may rent it back to the Sukuk issuer for a prearranged fee. The issuer will also pledge to buy back the Sukuk bond at the same value at a future date. Due to a ban on debt trading under Shariah law, a Sukuk bond must be associated with the cash flow and return of the funding to the purchased asset.
- #52: Shell MDS (Malaysia) Sdn. Bhd. (SMDS) Shell MDS (Malaysia) Sdn. Bhd. (SMDS) is a joint venture of Mitsubishi Corporation, the Royal/Dutch Shell Group of Companies (Shell), state-owned Petroliam Nasional Berhad (Petronas) and the Sarawak State Government. SMDS, which is located in Bintulu in Malaysia's Sarawak State, started operation in 1993 with a yearly production of approximately 500,000 tons. SMDS is the world's first commercial project to employ Gas to Liquids (GTL) technology, which can be used to produce petroleum products, chemical products, wax, and other materials from natural gas. The technology is seen to have huge potential as an effective way for utilizing natural gas. The project uses a process based on Shell's GTL technology. Products produced from natural gas are much more environmental-friendly than other petroleum products, and therefore a higher market-evaluation is expected.