Bond Basics #2

A basic coupon bond has the following features

  • On issue date, initial bond face value is paid to issuer (investor buys a bond)
  • Regular coupon payments received by investor (represents the interest)
  • At maturity, bond face value is redeemed (returns the loan)

image_thumb.png

An illustration

  • Consider a coupon bond with a face value of $100,000;
  • Bond maturity: 5 years
  • Coupon Rate: 4%;
  • Coupon Payment: Semi-annual
  • image.png

Why is it called a bond coupon? Read more at Coupon

Most governments raise a lot of debt (short, medium and long term) to finance investment and expenditure.

Some basic government bonds

Gilts (UK)

  • A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange
  • The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security
  • This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due
  • These have a maturity of 5, 10, 30 and 50 years

US Treasury – Bills, Notes and Bonds

The US treasury issues a number of securities to raise money required for various government program

These are three key types of securities

  • Treasury Bills (T-Bills) have a maturity of < 1 year
  • Treasury Notes (T-Notes) have a maturity of 2, 3, 5, 7 and 10 years
  • Treasury Bonds (T-Bond) have a maturity of 30 years

Japanese Government Bonds (JGB)

JGB’s are issued by the Japanese government, which is responsible for interest and principal payments

Payment is guaranteed by the Government

  • JGB’s are a financial product traded in the market. So, you don’t need to wait for maturity.
  • The principal amount will be paid at maturity
  • Maturities can vary from 2 to 40 years

Government Securities and Types

Selected Countries

FI Country Bonds

 

The next topic will be on Fixed Income Security types and features.

Advertisements