DEBT SECURITIES

MARKET

GROUP 1
 What is DEBT SECURITIES
MARKET
 Refers to money borrowed that must be repaid which
has a fixed amount, a maturity date and usually a
specific rate of interest.
Two major ways of obtaining debt securities:

Primary Market
Secondary Market
 Debt securities is comprised of:
 Outright purchases and sales market
 Offering market for qualified investors
 Repo – Reverse Repo Market
 Repo Market for Specified Securities
 Equity Repo Market
 Offering Market for Qualified Investors
 International Bonds Market
 Committed Transactions Market
 Watchlist Market
 TYPES OF LONG-TERM
SECURITIES

• Stocks - are equities and when you own a stock, you own a piece of the company.

• Mutual funds or Exchange Traded Funds (ETFs) - are simply baskets of stocks
or bonds, or a combination of the two.

• Municipal Bonds - Municipalities have all sorts of projects they need to

undertake. Many times they don’t have the money needed for these projects. As
such, they will issue bonds to raise the cash needed and in return, pay out interest
to the owner of the bond.
 Cont.

• Treasury bond (T-bond) - is a government debt security

that earns interest until maturity, at which point the owner
is also paid a par amount equal to the principal.

• Savings bonds - are bonds sold by the U.S. Treasury. They

are used to raise money from the public to fund its
operations and administer the economy.
Cont.

• Inflation Protected Securities (TIPS) - are also a bond. However, instead of just
paying a set rate of interest, you also earn an additional interest adjustment based on
inflation.

• Alternative investments - are investments outside of stocks, bonds and real estate.

• Real Estate - In the most basic definition, a real estate investment trust is to a real
estate property as a mutual fund is to stock.
STRATEGIES AND CHALLENGES
OF BOND MARKET
 What is BOND MARKET
• Often called Debt Market or Credit Market

• A financial marketplace where investors can trade in

government-issued and corporate-issued debt securities.
 Challenges of Bond
Market
• Corporate bond issues are limited to certain large
companies, and the proportion of top ranking companies
with large outstanding amount is high.
• Issues by companies with low ratings.
• Bond issues remain an appropriate method of raising
funds for companies in such areas as energy and
infrastructure.
Strategies of Bond Markets

• Sustain a stable macroeconomic environment with low

inflation and stable interest rates.
• Developing a healthy government bond market that could
serve as a benchmark for the corporate bond market.
• Completing posterisis agenda of banking sector
restructuring.
• Improving corporate governance
Cont.

• Strengthening the regulatory framework for bond markets

• Rationalizing tax treatment of bonds
• Broadening the investor base
• Promoting the growth of regional bond market centers
ASSESSING BOND
VALUE
 BOND VALUE
• When a company or government borrows money from
the public or banks on the bond holders and agree to pay
back later.
 BOND VALUATION
• A way to determine the theoretical fair value of a
particular bond.

• It involves calculating the present value of bond’s

expected future coupon payments or cash flow and the
bond’s value upon maturity or face value.
 Terms that we should consider in bond valuation

1. Par Value
2. Coupon Payments
3. Indenture
4. Maturity Date
5. Market Interest Rate
6. Effective Rate > Stated Rate = Discount
7. Effective Rate < Stated Rate = Premium
 Sample
Problem
• On January 1, 2014, Life Works Inc. issued $1000, 2000
bonds at a stated rate of 10%. At this time, the market
selling those bonds at 12%. The bond must be paid back
by January 1, 2024. Interest is paid semi-annually starting
June 30, 2014.
STEPS IN BOND PRICING

• Convert interest rates and repayment period

• Calculate interest paid
• Calculate present value of interest payments (annuity)
• Calculate present value of bonds
• Calculate bond price