International Finance and Payments

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International Finance and Payments
Academy of Economic Studies Faculty of
International Business and Economics

• Lecture IX
• International Bond Market

Lect. Cristian PAUN Email cpaun_at_ase.ro URL
http//www.finint.ase.ro
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International Bond Market
General Situation
Types of Bonds
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International Bond Market
Situation by Issuing Institutions
Romanian Experience on International Bond Market
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International Bond Market
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Bond Issuing Mechanism - IPO
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Bond Definition
- Bond a security that is issued in connection
with a specific borrowing arrangement

• Bond indenture the contract between the issuer
  and the borrower
• Main elements of the contract
• Face value
• Coupon rate
• Issuing price
• Bond premium

- Bond classification - T-Bonds - Municipal
Bonds - Corporate Bonds
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Types of Corporate Bonds

• Call Provisions on Corporate Bonds
• allows the issuer to repurchase the bond at a
  specific call price before the maturity
• The call price is above par value according with
  maturity (it falls as time passes)
• Usually offers a higher coupons rates then
  noncallable bonds.
• Convertible Bonds
• Give to the bondholders an option to exchange
  each bond for a specified number of shares of
  common stock of the firm
• The Conversion Rate Number of Bonds / Number of
  Stock
• The Conversion Premium Bond Par Value x Number
  of Bonds Current Stock Price x Number of Stock

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Types of Corporate Bonds

• 3. Puttable Bonds
• Allows the bond holder to extend or to sell bond
  at a specific date (call date)
• The holder is interest to extend the bond life
  when the bond current yield exceeds current
  market yields
• When the coupon rate is too low the holder will
  reduce the holding period
• 4. Floating Rate Note
• Make interest payments that are tied to some
  measure of current market rate (T-Bill rate
  adjusted with 4)
• Major risk changes in the companys financial
  strength (if the financial situation will be
  worse the price of the bond would fall because
  the investors will require a greater yield
  premium than the security can offer).

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Innovation in the Bond Market

• Reverse Floater Bonds the coupon rate falls
  when the general interest rates rises (the
  benefit of the investors is double when the rates
  falls higher price and higher interest rate)
• Asset - Backed Bonds - issuing a bond with a
  coupon rate connected to the financial
  performance of several firms from the same group
  (example Walt Disney, David Bowie)
• Catastrophe Bonds - issuing a bond with a final
  payment that depended on whether there a
  catastrophe will be produced (example Electrolux
  and a possible earthquake in Japan).
• Indexed Bonds - make payments that are tied to
  a general price index or a particular commodity
  price (example Mexico issued a bond tied to the
  price of oil).

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Indexed Bonds Example
Nominal Return(InterestPrice Appreciation)/Initi
al Price Real Return(1Nominal
Return)/(1Inflation)
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Bond Value and Bond Price
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Bond Yields Yield to Maturity
YTM 6
Bond Yields Current Yield
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Bond Yields Yield to Call
YTM 6.23
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Determinants of Bond Safety

• Coverage Ratios ratios of company to fixed costs
  
• Times interest earned ratio (EBIT/Interest
  Obligations)
• Fixed Charge Coverage Ratio (EBIT/(InterestLease)
  
• 2. Leverage Ratio (Debt-to-Equity Ratio)
• 3. Liquidity Ratios
• Current Ratios Current Assets / Current
  Liabilities
• Quick Ratios (Current Assets Inventories) /
  Current Liabilities
• 4. Profitability Ratios
• ROA EBIT / Total Asset
• 5. Cash Flow to Debt Ratio (Cash Flow to
  Outstanding Debt)

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Financial Ratios by Rating Classes
Source Bodie, Kane, Marcus Investment, page
437, McGraw-Hill Irwin, 2003