14 Questions
Duration is a number expressing how quickly the investor will receive half of the total payment due over the bond's remaining life, with an adjustment for a fact that payments in the distant future are worth less (less purchasing power) than payments due soon. COUPON This is the stated annual interest rate as a percentage of the price at issuance (pay value). Once a bond has been issued, its coupon never changes. Thus a bond that was issued for P100,000 and pays P6,000 of interest each year would be said to have a 6% ______.
coupon
Duration is a number expressing how quickly the investor will receive half of the total payment due over the bond's remaining life, with an adjustment for a fact that payments in the distant future are worth less (less purchasing power) than payments due soon. ______ This is the stated annual interest rate as a percentage of the price at issuance (pay value). Once a bond has been issued, its coupon never changes. Thus a bond that was issued for P100,000 and pays P6,000 of interest each year would be said to have a 6% coupon.
COUPON
MATURITY This is the date on which the bond issuer will pay the principal (pay value of the bond) and will redeem the bond. The number of years to maturity is the ______. In practice, term and maturity are often used interchangeably. Bonds with maturities of 1 year or less are usually categorized as short-term, those with maturities of more than 1 year up to 10 years as medium-term and those with maturities exceeding 10 years as long-term. Few bonds are issued with maturities beyond 30 years, and in many countries the longest ______ is only 10 or 20 years.
term
Bonds with maturities of 1 year or less are usually categorized as short-term, those with maturities of more than 1 year up to 10 years as medium-term and those with maturities exceeding 10 years as long-term. Few bonds are issued with maturities beyond 30 years, and in many countries the longest ______ is only 10 or 20 years.
maturity
What term is used for dollar-denominated securities issued in the United States by non-US issuers?
Yankee bonds
Who are the largest owners of US Treasury bonds, according to the text?
Investors from outside the United States
What term is used for yen-denominated bonds placed by foreign issuers in the Japanese market?
Samurai bonds
Which type of bonds are denominated in neither the currency of the issuer's home country nor that of the country of issue?
Eurobonds
What is the total amount of government debt traded outside the issuer's home country as of 2017?
$1.6 trillion
Why might a French firm intending to build an electrical generation plant in Turkey borrow in Turkish liras rather than in euros?
To match the borrowing with the intended income in liras
What is a key reason why borrowers from other countries can often obtain lower interest rates in the main bond markets of New York and London?
Greater liquidity of the main bond markets
Why might an international issue be undertaken by an issuer?
To establish the issuer's reputation among international investors
What is the purpose of the stated annual interest rate as a percentage of the price at issuance (pay value)?
To calculate how much interest the bond will pay each year
What does duration measure for a bond?
How quickly the investor will receive half of the total payment due over the bond's remaining life
Study Notes
Bond Characteristics
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Duration: a number expressing how quickly an investor will receive half of the total payment due over the bond's remaining life, with an adjustment for the fact that payments in the distant future are worth less due to reduced purchasing power.
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Coupon: the stated annual interest rate as a percentage of the price at issuance (pay value), which never changes once a bond has been issued.
Maturity
- Maturity: the date on which the bond issuer will pay the principal (pay value of the bond) and redeem the bond.
- Number of years to maturity: the duration from issuance to redemption.
- Bonds with maturities of 1 year or less are categorized as short-term, those with maturities of more than 1 year up to 10 years as medium-term, and those with maturities exceeding 10 years as long-term.
International Bond Market
- Yankee bonds: dollar-denominated securities issued in the United States by non-US issuers.
- The largest owners of US Treasury bonds are the Federal Reserve, pension funds, and foreign central banks.
- Samurai bonds: yen-denominated bonds placed by foreign issuers in the Japanese market.
- Eurobonds: denominated in neither the currency of the issuer's home country nor that of the country of issue.
International Bond Issuance
- A French firm might borrow in Turkish liras to build an electrical generation plant in Turkey to avoid currency risks.
- Borrowers from other countries can often obtain lower interest rates in the main bond markets of New York and London due to their larger size and deeper liquidity.
- International issues may be undertaken by an issuer to access a broader investor base, reduce borrowing costs, or manage currency risks.
Test your understanding of bond duration and coupon concepts. Explore how duration measures the time it takes for an investor to receive half of the total payment, adjusted for the decreasing value of future payments. Also, understand the significance of the fixed annual interest rate, known as the coupon, in bond investments.
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