Fixed Income Securities

Introduction to Fixed Income Markets

Fixed Income - Defining Elements

A Bond is a most common example of a fixed

income security

Contractual promise to make a series of interest

payments and principal amount at maturity

When plotted on a timeline, a bonds cash

flows would be as follows
Principa
l
T1

T2

T3

T..

T...

T..

Tn

T0
Int

Int

Int

Int

Int

Int

Int
+
Prin

Fixed Income - Defining Elements

Key features of a Fixed Income Security

include the specification of

Issuer
Maturity Date
Par Value (Principal)
Coupon Rate
Frequency of Coupon Payments
Currency
Collateral
Seniority

Fixed Income Classification

By Issuer type

Companies often divided as FI & Non FI

National Governments e.g. GoI
State Governments e.g. State of Maharashtra
Quasi Government e.g. NHAI
Supra National e.g. World Bank or IMF
Special Purpose Vehicles Structured Debt

By Maturity/ Tenor (time to maturity is called

tenor)

Term Bonds

Money Market Original Maturity < 1 year

Capital Market - Original Maturity >1 year

Perpetual Bonds Only periodic coupon

Fixed Income Classification

By Par Value

Par value is the principal amount to be repaid at

maturity
Market prices are generally quoted as a % of Par

Market Price = Par Value Bond Trading at Par

Market Price > Par Value Bond Trading at Premium
Market Price < Par Value Bond Trading at Discount

By Coupon Type

Fixed rate Bonds

Floating rate Bonds

Benchmark +/- Margin or Spread e.g. LIBOR+75bps

Inverse floater

Fixed rate minus Benchmark e.g. 6% - LIBOR

Fixed Income Classification

By Coupon Frequency

By Collateral

Conventional Bonds pay coupons at periodic intervals

(usually Annual or Semi-Annual)
Zero Coupon Bond Also known as Deep Discount
Bonds
Deferred Coupon Bonds
Step Up Coupon
Secured
Unsecured

By Seniority

Senior
Subordinated or Junior

Fixed Income Classification

By Currency

Domestic Bonds
Foreign Bonds

By Repayment type

Plain Vanilla

Bullet
Amortising
Ballooning

With Options

Callable Right with the Issuer to Buy back the Bond

Putable Right with the Investor to Sell back the Bond
Convertible Convert into specified number of equity
shares (similar to Call option with investors to buy the
shares of Issuer)

Fixed Income Bond Indenture

Indenture

Legal contract between the Issuer & Bondholders

(Investors)
Also called Trust Deed
Contains terms & conditions, rights & obligations of all
the parties to the issue

Covenants are the provisions in the bonds

indenture and includes

Affirmative (Positive) Covenants actions which the

borrower promises to perform. e.g. insure and maintain
assets, comply with regulations, etc.
Negative Covenants Restrictions on the Borrower that
help to protect the bondholders interest e.g. D/E ration
not to exceed 3 times, negative lien on collateral, etc.

Fixed Income Markets

Primary Markets - First time issue of Securities

Public Offering - Retail

Private Placement - Institutional Investors
Prospectus will contain details of the Issue

Shelf registration quick & lesser disclosures

Secondary Market Previously issued securities

are traded

Exchange Traded Some G-Secs & Corporate Bonds

Over-the-Counter or Dealer market Vast majority of
Bonds

Bid (Purchase) & (Selling) Quotes

Spread Indicator of Liquidity

Settlement through a clearing mechanism helps

reduce default risk

Fixed Income Issuers

Government

Banks

ST T Bills
MT T Notes
LT T Bonds
ST Certificate of Deposits
MT Bonds
LT Bonds
Capital Adequacy Hybrids, Perpetual Bonds

Corporations

ST Commercial Paper
LT Corporate Bonds

Fixed Income Investors

Retail

Individuals
Small businesses
High Net Worth Individuals

Institutional

Banks PSU & Private

Co-operative Banks
Financial Institutions/ NBFCs
Corporates
Insurance Companies
Mutual Funds
Provident Funds/ Pension Funds
Hedge Funds

Fixed Income Intermediaries

Primary Dealers
Brokerages/ Dealer

Investment Banks

Standalone
Bank run
Underwriting
Best Efforts

Rating Agencies
Trustees
Depositaries
Registrar

Fixed Income Regulators

Ministry of Company Affairs

SEBI
Stock Exchanges
Industry Regulators

RBI - Banks
IRDA Insurance Companies
AMFI Mutual Funds
PFRDA Pension Funds
Ministry of Labour/ Ministry of Finance Provident
Funds

Fixed Income Pricing Conventions

Flat price/ Clean price/ex-Interest: Only the market

price
Accrued Interest

Coupon rate: agreed rate on the bond

Coupon payment dates: Determined at the time of
issuance

Day-count convention: How number of days are

calculated

Annual/Semi-annual

30/360 US Corporate Bonds & Indian G Sec. Most Treasuries

Actual/360
Actual/Actual US Govt Bonds & Indian Corporate Bonds
Actual/ 365 Indian T-Bill market

Full price/Dirty price/cum-Interest: Price including

accrued interest

Questions

Which of the following is an example of a

money market instrument?

A) 7.90% GOI Bond maturing 2025

B) 90D Commercial Paper issued by L&T Limited
C) 12.25% Unsecured Bond maturing 2020 issued
by RIL

Compared to an issue backed by collateral of

Tangible fixed assets ; an unsecured bond is

A) more risky
B) less risky
C) same risk

Questions

XYZ Ltd is under liquidation. Which of the

following bonds issued by it should be paid
back last

A) INR 10,00,000 face value 9.85% Senior Notes

B) USD 1000 face value L+725 bps Mezzanine
Bonds
C) INR 10,00,000 face value 13.00% Subordinated
Debt

Which of the following quotes is an example of

a $1000 face value Bond trading at discount

A) $1000
B) $998.50

Questions

Which of the following pairs is an example

of a Bullet and Amortizing repayment
structure respectively

A) Corporate Bond & Mortgage Loan

B) Mortgage Loan & Corporate Bond
C) Perpetual Bond & Student Loan

Indigo Limited is planning to issue a 5year

Bond. It has never previously issued a
Bond. This issuance would be made in

A) Primary market
B) Secondary market

Questions

Investors of Abacus Limiteds bonds can sell the

bond back to the company anytime prior to its
maturity in June 2020. This is an example of

A) Callable Bond
B) Putable Bond
C) Convertible Bond

HDFC Bank wants to raise funds for 120-180

days tenor to meet its short term fund
requirements. It can issue

A) Commercial Paper
B) Treasury bill
C) Certificate of Deposit

Questions

A 9 year bond pays coupons of 3% for 1-3

years; 6.5% for 4-6 years and 10% thereafter
until maturity. This is most likely to be a

A) Zero Coupon Bond

B) Step-up Coupon Bond
C) Floating rate bond

A bid of 998.25 for the primary issue of 10Y G

sec has been received by RBI. It is most likely
to be given by

A) CRISIL Limited
B) IDBI Trusteeship Limited
C) SBI Primary Dealership Limited