Submitted to :- Mr.

Nitin Jain Submitted By :-

SUSHIL KUMAR
PGP 2008-10
Fostiima business School
WHAT IS A BOND?
A bond is a debt security, similar to an
I.O.U. When you purchase a bond, you are
lending money to a government,
municipality, corporation, federal agency
or other entity known as the issuer.

Bonds issued by corporations or the US

government are usually taxable
Bonds issued by state governments or
municipalities are usually exempt from tax
Components
The issuer, similar to a holder of an option
Principal amount
Specified interest rate; paid to the issuer
yearly (also known as the coupon)
Date of maturity
Basic Bond Concepts
Par Value
Coupon or Interest Rate
Maturity
Redemption Features
Yield
INTEREST RATES
FIXED: Stays same until maturity; i.e: buy a
$1000 bond with 8% fixed interest rate and you
will receive $80 every year until maturity and at
maturity you will receive the $1000 back.
FLOATING: adjustable to prevailing market rates.

PAYABLE AT MATURITY: receive no payments

until maturity and at that time you receive
principal plus the total interest earned
compounded semi-annually at the initial interest
rate.
MATURITY
1.Short-term notes: maturities of up to 4 years;
2.Medium-term notes/bonds: maturities of five
to 12 years;
3.Long-term bonds: maturities of 12 or
more years.
REDEMPTION
Bond with a redemption provision usually
have higher return to compensate for the
risk that the bonds might be called early.
Call Option: provisions that allow or require the
issuer to repay the investors’ principal at a
specified date before maturity.
Put Option: option of requiring the issuer to
repurchase the bonds, at a specified time, prior
to maturity.
YIELD
Yield is the return you actually earn on the
bond--based on the price you
paid and the interest
payment you receive
Two Types of Yields:
Current Yield: annual return on the
dollar amount paid for the bond and is
derived by dividing the bond's interest
payment by its purchase price
Yield To Maturity: total return you will
receive by holding the bond until it
matures or is called.
TYPES OF BONDS
1. Assets Backed Securities
2. Extendible Bonds
3. Foreign Currency Bonds
4. High Yield or Junk Bonds
5. Mortgage-backed Securities
6. Zero Coupon
7. Eurobonds
8. Government Bonds
9. Corporate Bonds
TYPES OF BONDS
Assets Backed Securities :- ABS are bonds or notes
backed by financial assets like receivables.
Extendible Bonds :- An extendible bonds gives its
holder the right to extend the initial maturity to
a longer maturity date.
Foreign Currency Bonds :- A “foreign currency”
bond is bonds that is issued by an issuer in
currency other than its national currency.
High Yield or junk Bonds :- These are usually
purchased for speculative purposes. Junk bonds
typically offer interest rates three to four
percentage points higher than safer government
issues.
TYPES OF BONDS
Mortgage–backed Securities :- Mortgage
securities represent an ownership interest in
mortgage loans made by financial institution
to finance the borrower’s purchase of a home
or other real estate.
Zero coupon Bonds :- Zero coupon bonds are
fixed income securities that are created from
the cash flows that makes up a normal bond.
(Treasury bills)
Eurobonds :- Eurobonds are distinct from
domestic bonds and foreign bonds.
TYPES OF BONDS
Governments Bonds :- Govt. securities are
classified according to the length of time
before maturity
2.Bills- Less than one years
3.Notes- Between one to ten years
4.Bonds- More than 10 years
Corporate Bonds :- Corporate bonds are debt
obligations, or IOUs issued by private and
public corporations.
 Moody's S&P Fitch  

Long Term Short Term Long Term Short Term Long Term Short Term  

Aaa AAA AAA Prime
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- A-1+ AA- A1+ High grade
A1 A+ A+
A2 P-1 A A-1 A A1

A3 A- A- Upper Medium grade

Baa1 P-2 BBB+ A-2 BBB+ A2
Baa2 BBB BBB

Baa3 P-3 BBB- A-3 BBB- A3 Lower Medium grade

Ba1 BB+ BB+ Non Investmentgrade

Ba2 BB BB speculative
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B B- B Highly Speculative

Caa CCC+ Substantial risks

Ca CCC Extemely speculative

In default with little

C CCC- C CCC C prospect for discovery

/ DDD

Not Prime D / / In default