Bonds are debt investments in which an investor loans money to an issuer (typically corporate or governmental) which borrows the money for a defined period of time at a variable or fixed interest rate. Investors of bonds are debt holders of the issuer.
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| Term | Definition |
|---|---|
| Coupon Rate | Stated rate of interest that the bond issuer promises to pay the bondholder over the life of the bond, unless it is a floating rate bond. |
| Maturity Date | Indicates the length of time until the bond comes due and the bondholder is repaid the face value of the bond. |
| Price or Yield | A percentage measurement. Price of 100 = “100% of notional amount”. Similarly, price of 88.65 = “88.65% of notional amount” |
| Par Value/Notional Amount | Face value of the bond. The amount is used to calculate payments made on that instrument. eg. HKD250,000, USD100,000, CNY1mil. |
| Discount | Bonds trading below par value trade at a discount. |
| Premium | Bonds trading above par value trade at a premium. |
| Bid Price | The price at which bondholders can sell a bond to dealers. |
| Ask Price | The price at which the public can buy a bond from a dealer or trader. |
| Bid/ask Spread | Difference between the bid and ask price of the bond, part of which is a commission that goes to the broker. |
| Accrual interest | The interest that has accumulated since the principal investment, or since the previous interest payment. When a bond is sold between interest payment dates, the seller is eligible to some fraction of the coupon amount |
| Credit Rating | An evaluation by a rating company of the probability that a particular bond issue will default |
| Seniority/ Ranking | Order of repayment in the event of a sale or bankruptcy of the issuer. |
| Day count convention | This determines the number of days between two coupon payments and how interest accrues over time. The day count is also used to quantify periods of time when discounting a cash-flow to its present value.
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| Term | Definition |
|---|---|
| Secured debt | Type of corporate bond that has some form of collateral, which is pledged to ensure that there is payment of the debt. |
| Senior/unsubordinated | Debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer. |
| Junior/subordinated | Debt which ranks after other debts should a company fall into liquidation or bankruptcy. |
| Term | Definition |
|---|---|
| Fixed Income | Fixed coupons over a fixed schedule. |
| Zero Coupon | No coupons to the holder and are issued at a discount. |
| Floater/Inverse Floater | Coupons that reset at predetermined times. The rate is usually based on an index or benchmark with some sort of spread added or subtracted to the benchmark. |
| Caps/floors | States the maximum/minimum coupon. |
| Step-up feature | Coupons increase or "step-up" at a stated date. |
| Deferred coupon | Coupons which only start paying after a stated date. |
| Risk Factor | Description |
|---|---|
| Interest Rate | As rates increase, bond prices decline and vice versa. Rate sensitivity is determined by maturity, coupon rate, embedded options. |
| Yield Curve | Interest rate sensitivity based on a parallel shift in yield curve not matching actual yield curve movement. |
| Credit | Default risk, widening credit spreads, downgrade risk. |
| Liquidity | Widening of bid-ask spread. |
| Exchange-Rate | Receiving less in domestic currency for a foreign currency denominated security. |
| Volatility | For bonds with embedded options, higher expected volatility implies high option values. |
| Inflation | The decline in value of securities cash flow due to inflation, which is measured in terms of purchasing power. |
| Event | 1) Natural Disasters or Industrial Accidents 2) Corporate Takeovers/Restructurings 3) Regulatory Risk |
| Moody's | S&P | Fitch | Rating description | Grade | |||
|---|---|---|---|---|---|---|---|
| Long-term | Short-term | Long-term | Short-term | Long-term | Short-term | ||
| Aaa | P-1 | AAA | A-1+ | AAA | F1+ | Prime | Investment Grade |
| Aa1 | AA+ | AA+ | High grade | ||||
| Aa2 | AA | AA | |||||
| Aa3 | AA- | AA- | |||||
| A1 | A+ | A-1 | A+ | F1 | Upper medium grade | ||
| A2 | A | A | |||||
| A3 | P-2 | A- | A-2 | A- | F2 | ||
| Baa1 | BBB+ | BBB+ | Lower medium grade | ||||
| Baa2 | P-3 | BBB | A-3 | BBB | F3 | ||
| Baa3 | BBB- | BBB- | |||||
| Ba1 | Not prime | BB+ | B | BB+ | B | Non-investment grade speculative |
Non-Investment Grade |
| Ba2 | BB | BB | |||||
| Ba3 | BB- | BB- | |||||
| B1 | B+ | B+ | Highly speculative | ||||
| B2 | B | B | |||||
| B3 | B- | B- | |||||
| Caa1 | CCC+ | C | CCC | C | Substantial risks | ||
| Caa2 | CCC | Extremely speculative | |||||
| Caa3 | CCC- | Default imminent with little prospect for recovery |
|||||
| Ca | CC | ||||||
| C | |||||||
| C | D | - | DDD | - | In default | ||
| - | DD | ||||||
| D | |||||||
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