By IAM Capital Markets
Issuer
The issuer of a bond is an entity or corporation seeking to raise cash by issuing an instrument of debt, a bond, in the capital markets. Most bonds IAM clients invest in are issued by corporations of various sizes or state and national governments. Investors looking to hold a particular type of bond may deal with a subset of issuers. For example, investors wanting index annuity bonds will find them issued by infrastructure companies while those looking for investment-grade hybrids may only find them available from major banks.
Currency
A bond’s currency is the currency in which the bondholder will pay the consideration amount (the amount required to purchase a bond from a previous bondholder) or the principal value (the amount required to purchase a bond from its issuer). It is also the currency in which the bondholder will receive coupon payments. Investors can purchase, for example, bonds issued in USD with AUD, but transactions are subject to exchange rates. We offer bonds in a range of currencies, including AUD, USD, and EUR.
Sector
Sector refers to the industry the issuer is in. If an investor purchases a bond issued by a corporation in the basic materials industry, their loan may be providing funds for that company to procure natural resources to produce common goods.
Payment Rank
The payment rank helps describe the level of safety associated with a particular asset sub-class; it is also the entitlement of different asset holders to repayment in the event of default. In the chart provided, commonly called the capital stack, the closer to the bottom the investment is, the riskier it is; the investor is more likely to lose out if the issuer defaults. Bonds can be ranked as senior or subordinated (also referred to as junior), and secured or unsecured. Holders of senior bonds are entitled to receive the return on their investments before holders of junior bonds are in the event of the issuer default. Secured bonds are collateralised by an asset (for example, property) so that in the event of issuer default, investors have a claim to the issuer’s assets. An unsecured bond is not tied to any assets available for claim.
Coupon Type
The most common types of coupons are fixed, floating, and inflation linked. If a coupon is fixed, the investor is paid the same coupon at each payment while the bond is in their possession. In Australia, floating coupons are set at a certain amount above or below the BBSW (the Bank Bill Swap Rate). The BBSW is reset by the Reserve Bank of Australia, so as the BBSW changes the coupon amount an investor is paid also changes. For variable coupons, the coupon is fixed up until the bond’s first call date. We assume bonds will be called – they will be redeemed by the issuer – at their first call date.
Coupon Formula
The coupon formula shows how a bond’s coupon will be reassessed throughout a bond’s lifetime. The frequency and the benchmark with which it reassessed is are determined by the type of bond it is.
Current Coupon
The current coupon is the coupon a bondholder will receive at each payment date, The amount an investor receives from a coupon can change if it is set against a benchmark, for example, the BBSW, but the coupon formula itself remains unchanged throughout the life of a bond unless specified otherwise.
Maturity Date
The end date of a bond. Unless stated otherwise, this is the date at which the principal amount (the amount initially paid to acquire a bond) is returned to the bondholder. An example exception to this general rule is capital indexed bonds, with which interest payments are given to the bondholder at the maturity date along with the principal amount. Bonds with no maturity date are perpetual instruments; bondholders may receive payments indefinitely.
Call Date
A date set by the issuer on which they can redeem their bond by returning the principal value and accrued interest amount to the bondholder.
Clean Consideration
The clean price is multiplied by the face value.
Rating (S&P, Fitch, Moody)
Bond ratings are measures of financial security determined by rating agencies (S&P, Moody’s, Fitch) using information about the financial strength of the company or entity providing the bond. An investment grade bond is a bond that has been rated above BBB- or Baa3 in the chart below. Bonds rated below investment grade level are considered junk bonds and are a riskier investment.
Face Value
A bond’s face value is the amount that is promised to be paid back to the bondholder by the issuer at the bond’s maturity date. This is also referred to as the principal value.
Yield
Also known as yield to maturity, this metric describes the total income a bondholder will receive expressed as a percentage assuming they hold it until maturity, and therefore receive all interest payments. It differs from running yield in that it accounts for all future cash flows.
Margin (TM/ASW)
The trading margin is most relevant for bonds with floating-rate coupons. The margin describes how far above or below a bond’s coupon is set from the swap rate, or the relevant benchmark being used. When calculating the yield to maturity, the current market price of a bond discounting its current cashflows, the margin is added to the benchmark to help account for risk.
Running Yield
This term refers to a bond’s interest rate and is calculated based on the coupon payment and the current market price. This is the annual income from coupon payments that is calculated by dividing the coupon by the current market price and multiplying it by 100. For example, if you have a bond with a 5% coupon that is available at $101.50, then the running yield will be 4.92%.
Clean Price
The clean price refers to the price of the bond excluding any accumulated interest associated with it. This is important to consider when an investor purchases a bond in between coupon payment dates; while the investor will receive the whole coupon payment at the next payment date, they will only be entitled to half of it. When this occurs, the new bondholder will pay the previous bondholder the appropriate amount.
Accrued Interest
This is the portion of a coupon payment that a new bondholder pays the previous bondholder when acquiring their issuance between interest payment dates. The amount of interest the previous bondholder is entitled to is the amount between the coupon payment date and the date of purchase by the new bondholder.
Gross Consideration
Gross consideration is the clean consideration added to accrued interest.
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