straight bond

Examples of straight bond in the following topics:

• Call Provisions

  • A callable bond (also called redeemable bond) is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.
  • With a callable bond, investors have the benefit of a higher coupon than they would have had with a straight, non-callable bond.
  • Price of callable bond = Price of straight bond – Price of call option
  • Price of a callable bond is always lower than the price of a straight bond because the call option adds value to an issuer.
  • Similarly, yield on a callable bond is higher than the yield on a straight bond.

• Other Features

  • Other important features of bonds include the yield, market price and putability of a bond.
  • Bondholders are ready to pay for such protection by accepting a lower yield relative to that of a straight bond.
  • Price of puttable bond = Price of straight bond + Price of put option
  • Price of a puttable bond is always higher than the price of a straight bond because the put option adds value to an investor.
  • Yield on a puttable bond is lower than the yield on a straight bond.

• Time to Maturity

  • The issuer of a bond has to repay the nominal amount for that bond on the maturity date.
  • Most bonds have a term of up to 30 years.
  • The fair price of a "straight bond," a bond with no embedded options, is usually determined by discounting its expected cash flows at the appropriate discount rate.
  • Where the market price of a bond is less than its face value (par value), the bond is selling at a discount.
  • Conversely, if the market price of bond is greater than its face value, the bond is selling at a premium.

• Taxes and Bond Prices

  • Taxes can cause bond prices and interest rates to differ.
  • For example, the U.S. government bonds have a lower risk of default and higher liquidity than municipal bonds, whereas municipal bonds are the state and local government bonds.
  • Government has exempted municipal bonds from federal taxes.
  • On the other hand, the taxed bonds are not as attractive as an investment, so investors buy fewer bonds, causing bond prices to fall and interest rates to rise.
  • Therefore, municipal bonds have a lower interest rate than U.S. government bonds.

• Other Types of Bonds

  • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
  • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
  • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
  • A serial bond is a bond that matures in installments over a period of time.
  • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.

• Purchase Process

  • Most individuals purchase bonds via a broker or through bond funds.
  • Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
  • An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
  • Most bond funds pay out dividends more frequently than individual bonds.
  • Bond funds invest in many individual bonds, so that even a relatively small investment is diversified.

• Liquidity and Bond Prices

  • Liquidity causes bond prices and interest rates to differ.
  • We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
  • Thus, both bond markets have the identical equilibrium bond price, P*, and hence, the exact liquidity.
  • Thus, the government bond prices rise, which reduces the interest rate for government bonds.
  • On the other hand, the corporate bond prices decrease, raising the market interest rate for corporate bond.

• The Nature of Bonds

  • A bond is an instrument of indebtedness of the bond issuer to the holders.
  • A bond is an instrument of indebtedness of the bond issuer to the holders, as such it is often referred to as a debt instrument.
  • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
  • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
  • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

• Advantages of Bonds

  • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
  • Most individuals who want to own bonds do so through bond funds.
  • Bonds are often liquid.
  • There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
  • A bond is an instrument of indebtedness of the bond issuer to the holders.

• Zero-Coupon Bonds

  • A zero-coupon bond (also called a "discount bond" or "deep discount bond") is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.
  • Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds.
  • This method of creating zero coupon bonds is known as stripping, and the contracts are known as strip bonds.
  • The bonds can be held until maturity or sold on secondary bond markets.
  • The impact of interest rate fluctuations on strip bonds is higher than for a coupon bond.