Christian Dave H.

Tadifa
BSMA 2-1
Module 5 – Debt Securities Market
1. Tabulate the different type of bonds and identify its differences
Types of Bonds Definition Purpose of Trading
Corporate Bond A corporate bond is a type To raise money for a variety
of debt security that is of purposes, such as
issued by a firm and sold to building a new plant,
investors. The company purchasing equipment, or
gets the capital it needs growing the business
and in return the investor is
paid a pre-established
number of interest
payments at either a fixed
or variable interest rate.
When the bond expires, or
"reaches maturity," the
payments cease and the
original investment is
returned.
Government Bonds A government bond is a To raise money to finance
debt security issued by a projects or day-to-day
government to support operations
government spending and
obligations. Government
bonds can pay periodic
interest payments called
coupon payments.
Government bonds issued
by national governments
are often considered low-
risk investments since the
issuing government backs
them.
Municipal Bonds a type of debt security To pay for capital
issued by local, county, and expenditures, including the
state governments. They construction of highways,
are commonly offered to bridges, or schools
pay for capital
expenditures, including the
construction of highways,
bridges, or schools.
Municipal bonds act like
loans, with bondholders
 becoming creditors.
Mortgage Bonds A mortgage bond is To transfer risks and help to
secured by a mortgage, or bring in more liquidity in the
a pool of mortgages, that capital market and protect
are typically backed by real lenders from losses.
estate holdings and real
property, such as
equipment.
Asset-backed bonds An asset-backed security To provide an alternative
(ABS) is a type of financial investment vehicle that
investment that is provides higher yields and
collateralized by an greater stability than
underlying pool of assets— government bonds. Asset-
usually ones that generate backed securities also
a cash flow from debt, such provide portfolio
as loans, leases, credit card diversification for investors
balances, or receivables. It looking to invest in other
takes the form of a bond or markets.
note, paying income at a
fixed rate for a set amount
of time, until maturity.
Collateralized Debt A collateralized debt To reduce the amount of
Obligation (CDO) obligation (CDO) is a risk they hold on their
complex structured finance balance sheet
product that is backed by a
pool of loans and other
assets and sold to
institutional investors.
Sustainability Bonds or Sustainability bonds are To fund projects that have
Green Bonds issues where proceeds are positive environmental
used to finance or re- and/or climate benefits.
finance a combination of
green and social projects or
activities. They can be
unsecured, backed by the
creditworthiness of the
corporate or government
issuer, or secured with
collateral on a specific
asset.
2. Essay: Discuss each bond valuation method and distinguish its differences and
where and how it should be used.
Bond valuation is the process of determining the fair price, or value, of a bond.
Typically, this will involve calculating the bond’s cash flow or the present value of a
bond’s future interest payment as well as its face value which is also known as par
value that refers to the bond’s value once it matures. A bond’s interest payments and
face value are fixed. This allows an investor to determine what rate of return a bond
needs to provide to be considered a worthwhile investment. Calculating the value of a
coupon bond factors in the annual or semi-annual coupon payment and the par value of
the bond. The present value of expected cash flows is added to the present value of the
face value of the bond. A zero-coupon bond makes no annual or semi-annual coupon
payments for the duration of the bond. Instead, it is sold at a deep discount to par when
issued. The difference between the purchase price and par value is the investor’s
interest earned on the bond. To calculate the value of a zero-coupon bond, we only
need to find the present value of the face value. The present value of a bond is
calculated by discounting the bond's future cash payments by the current market
interest rate. In other words, the present value of a bond is the total of: the present
value of the semiannual interest payments, plus present value of the principal payment
on the date the bond matures. Moreover, a zero-coupon bond, as the name suggests, is
a bond that does not pay an annual or semiannual interest payment. Instead, the bond
is purchased at a discount to its face value, and the investor receives a single payment
at maturity that includes the principal and accumulated interest earned. Bond valuation
is clearly a difficult task. As a result, many ordinary investors, as well as some experts,
prefer to invest in bond mutual funds. Choosing the best bond mutual fund begins with
determining your investing objectives and ensuring that they coincide with the objectives
of any fund you are considering.