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Introduction To Fixed Income Securities

This document provides an introduction to a course on fixed income securities. It discusses why a separate course focuses on fixed income, defines what fixed income securities are, and outlines some of the key topics that will be covered, including the major players in fixed income markets, the different types of bonds, sources of risk and return, and regulation. It also discusses how fixed income markets have become more complex over time with a variety of securities and derivatives, and why it is important for market participants to understand fixed income valuation and portfolio strategies.

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452 views11 pages

Introduction To Fixed Income Securities

This document provides an introduction to a course on fixed income securities. It discusses why a separate course focuses on fixed income, defines what fixed income securities are, and outlines some of the key topics that will be covered, including the major players in fixed income markets, the different types of bonds, sources of risk and return, and regulation. It also discusses how fixed income markets have become more complex over time with a variety of securities and derivatives, and why it is important for market participants to understand fixed income valuation and portfolio strategies.

Uploaded by

pranavsharad
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

m  


m  
 
Fixed Income Securities
MB 77
m
 Introduction to the Course
 Why a separate course only on Fixed Income
Securities?
 What are fixed-income securities?
 Participants/Players
 Meaning of a Bond
 Features of a Bond
 Types of Bonds
 Sources of Risk and Return in Debt Securities
 Regulation of Fixed Income Securities
à     

m    
 Markets Prior to 1980s
± Dominated by plain vanilla bonds with simple cash
flow structures
± Valuation was simple and straightforward
 Markets After 1980s
± Complex cash flow structures
± A variety of securities
± Derivative products to facilitate portfolio strategies to
control interest rate risk and to enhance return
± Wider range of investors
 Two thirds of the market value of all the securities
outstanding in world classified as fixed income
 Most participants in the corporate and financial sectors
participate in this market
 Federal governments, state governments, and
municipalities have not choice but to issue fixed income
securities
 Therefore, a need to have well informed participants so
that they understand
± the forces that drive the bond market
± The valuation of complex cash flow structures
± Portfolio management strategies
m   

 A detailed coverage of the fixed income


securities markets in contrast to one or two
chapters in a book on investments
 Coverage of securities available in the
market²Treasury, Agency, Municipals,
International, Mortgage, Mortgage-backed
securities, CMOs.
à  
m  
 
 Financial claims issued by government, government
agencies, state governments, corporations,
municipalities, and banks and other financial
institutions
 The cash flows promised to the buyer of fixed
income securities represent contractual obligations of
the respective issuers.
 Typically, when such contractual obligations are not
met, the buyers of fixed income securities will have
the right to take control of the firm that issued such
debt securities
 A fixed income security is a financial
obligation of an entity that promises to pay
a specified sum of money at specified
future dates. The entity promising the
payment is called the issuer of the security
 Two categories:
± Debt obligations²Bond Markets
± Preferred Stock
d 

 Issuers/sellers
‡ government, government agencies, state governments,
corporations, municipalities, and banks and other financial
institutions
± To receive a fair value for their securities
± Be able to issue securities that best fit their needs
 Investors
‡ Large institutions such as pension funds, insurance
companies, commercial banks, corporations, mutual funds,
and central banks
‡ Smaller institutions
‡ Individual investors
d 

± Objective is to buy/sell at a fair market price and at narrow


bid/offer spread.
 Intermediaries
± Help issuers in the initial offering of the security,
assist in pricing and distribution of the securities,
make a secondary market, provide liquidity, and
engage in proprietary trading activities
± Produce information about credit quality of different
issuers
± Provide liquidity and credit enhancement for a fee
›  

 Œlobal Bond Markets


 U.S. Bond Markets
   › 

 A debt instrument requiring the issuer also called


the debtor or borrower to repay to the
lender/investor the amount borrowed plus interest
over some specified period of time
 A typical ³plain vanilla´ bond issued in the U.S.
specifies
± A fixed date when the amount borrowed is due
± The contractual amount of interest, which is typically
paid every six months
 Cash flow pattern is know assuming no default

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