The following kinds of options are an integral part of the bond issue, and are not considered a separate security. Security Owner Options The option embedded in a fixed income security is an option granted to the security holder or lender, and gives an additional value to the security compared to the identical straight option, […]
Basics of Bonds
General Characteristics of Bonds
An option free (straight line) bond is a simple form of bond. For example, a bond issued by the Treasury for a par value of, say $1000, with a maturity period of five with an annual interest rate of six per cent on maturity value. In such a case, the issuer, in this case – […]
Accrued Interest, Clean Price, and Dirty Price
Accrued Interest When a bond holder sells the bond to a new buyer between the coupon dates, there will be some interest earned on the bond since the time the last coupon date. This interest is called the accrued interested and must be paid to the seller of the bond. Subsequently, the new owner of […]
Bond Spreads
Bond spread (or credit spread) refers to the difference in the yield of two bonds because of the difference in their credit ratings. The credit rating of a bond reflects the risk profile of the bond. For example, BB-rated corporate bond will be riskier compared to a Treasury security issued by the Government, which is […]
Bid-Ask Spread of Bonds
When you buy and sell bonds in the secondary market, you do so at a slightly different prices. The bid price is the price at which the dealer is willing to buy the bond from you. The ask price the price at which the dealer sells the bonds to you. The ask price is always […]
Impact of Liquidity on Bond Spreads
The various bonds trading in the market can have different liquidity. A highly liquid bond will trade very frequently, in large volumes, and will have a very low bid-ask spread. On the other hand a less liquid bond will trade less frequently and will have higher bid-ask spread. The liquid Treasury notes/securities are called “On-the-run” […]
Treasury STRIPS
STRIPS stands for Separate Trading of Interest and Principal Securities. These are zero-coupon securities that trade at a significant discount to the face value. STRIPS were introduced by the US government in 1985. Since they are backed by the government, they have near zero risk, and also offer tax benefits. They are also free from […]
Floating Rate Notes
The floating rate notes (FRNs) are bonds that offer a variable rate of interest to the investors. The floating rate is determined based on a reference rate, such as LIBOR, or any other reference rate. The floating rate on the notes will be specified as the reference rate (LIBOR) plus the spread. There are primarily […]
Inflation-Indexed Bonds
As the name suggests, in inflation-indexed bonds, the interest and principal payments are indexed to the inflation rate. This way the inflation-indexed bonds protect the investors from any rise in the inflation rate, and thereby allow investors to maintain their purchasing power. These bonds are also called inflation-linked bonds. For inflation-indexed bonds, the coupon bond […]
How to Read Bond Tables?
Once you know how to read bond quotes, you can easily interpret bond price tables given in newspapers or websites. We will take the example of Treasury bond prices, as shown in the table below: Rate: The first column shows the rate, i.e., the coupon paid by the bond. Note that the highlighted bond pays […]