Floating Rate Note

Floating Rate Note

Floating Rate Note

A floating-rate note is a debt instrument with a variable interest cost. The financing cost for an FRN is attached to a benchmark rate. Benchmarks incorporate the U.S. treasury note rate, the Federal Reserve funds rates known as the Fed funds---the London Interbank Offered Rate (LIBOR). The rate is changed month to month or quarterly corresponding to the benchmark. The maturity period of FRN’s change however is commonly in the scope of two to five years. These notes are regularly traded over-the-counter. (more…)
Deep Discount Bond

What is Deep Discount Bond

Deep Discount Bond

A bond issued with a face value of $1500 which means the investor will be paid $1500 at maturity plus any interest. However, bonds can be sold before maturity which is bought by other investors in a secondary market. Bonds that are issued at a value lower than their face value can be termed as a Discount bond. Since bonds are a type of debt security, bondholders receive interest which is called coupons from the bond issuer either monthly, quarterly, semi-annually, or annually. For example, if a bond worth $500 is sold in the secondary market for $150 can be termed as a Discounted bond. (more…)
Straight Bond

Straight Bond

Straight Bond

A bond is basically a security that provides an investor with a series of fixed interest payments over its tenure, including a fixed principal payment when it matures. It is the capital market instrument used to raise debt capital from the open market. Simply put, a bond is a loan taken at a certain interest rate for a certain amount of time and repaid on maturity. The most common bond type is Straight Bond. (more…)
Yield to Maturity

Yield to Maturity

Yield to Maturity

Yield is a calculation of the cash flow of the project over time which is expressed as a percentage. It takes into account all dividends or interest earned during the investment period. When a bond is held till maturity, the total return expected on it is called yield to maturity. It is also known as book yield or redemption yield. It is an annualized rate of return. It works on the belief that the security is purchased at the current price and is held till maturity and all interest and coupon payments are made in a timely manner. The YTM has some variants namely:
  • Yield to call: When the bond can be repurchased by the issuer before maturity it is known as yield to call.
  • Yield to put: The bondholder has the option to sell the bond back to the issuer at a fixed rate on a specified date.
  • Yield to worst: It is the lowest yield of YTM, YTP, YTC, and others.
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Puttable Bonds

Puttable Bonds

Puttable Bonds

A puttable bond is a debt instrument that gives the bondholder the right to sell the bond to the issuer at a predetermined price at a specified time before maturity. Essentially, it’s a bond with an embedded put option, giving the bondholder the right, but not the obligation to demand early repayment from the issuer. Types of embedded options can be call option, put option, and extension option (extends the maturity of the bond). (more…)
Theories of Term Structure

Theories of Term Structure

Theories of Term Structure

Interest Rates are a barometer of the Economy and an instrument for its control. The term structure of interest rates (the Yield Curve) represents the interest rates at different maturities of similar quality bonds. It shows the yield that an investor is expecting to earn if he lends his money for a given amount of time. It is an effective economic analytical tool. (more…)
Spot Rate and Forward Rate

Spot Rate and Forward Rate

SPOT RATE: The spot rate is the price quoted on a commodity, security, or currency for immediate settlement. Also called the "spot price" it is an asset's current market value at the time of quotation. In essence, this value is based on how much buyers are willing to pay and how much sellers are willing to accept,  which is typically based on a combination of factors like current market value and anticipated future market value. It reflects the supply and demand for an asset in the market. As a result, spot rates change frequently, and can sometimes swing dramatically, especially if there are significant events or relevant headline news. (more…)
AT1 Capital or Contingent Convertible Capital Instruments

AT1 Capital or Contingent Convertible Capital Instruments

AT1 Capital or Contingent Convertible Capital Instruments: Additional tier-1 (AT1) or contingent convertible capital instruments, known as CoCo bonds or Enhanced Capital Note (ECN) are the types of unsecured, perpetual bonds that are issued to absorb losses when the capital of the issuing financial institution falls below the regulatory standards. The purpose behind issuing the contingent convertible bonds is to maintain the ratio as per Basel III norms and existence of banks during the crisis.  As per Basel III norms, a bank must maintain enough capital to be able to withstand a financial crisis and absorb unexpected losses from loans and investments. Total regulatory capital consists of tier-1 capital, which includes common equity tier-1 (CET1) and AT1, as well as tier-2 capital. (more…)