239) Bond Specification & Calculation

239) Bond Specification & Calculation

Let's study an example of Bond specification for investors.

Below is the specifications:

Rating : Unrated
Structure : Senior Secured
Tenure : 5 years
Coupon : 4.35%
Indicative YTM : 4.18%
Indicative Price : 100.78

Let's go through each specification.

Rating : Unrated
This bond has no rating. Basically means no rating agency monitor the company and provide opinion on credit profile of the issuer. So the investor needs to do own research work and monitor the company financials closely.

Structure : Senior Secured
Senior secured can imply 2 things.

A company bond may have Senior bond and Junior bond. Generally, during liquidation, senior creditor (senior bond holder) will be paid off first if there is enough money, then followed by junior creditor (junior bond holder).

The Secured term usually refers to a collateral backing the bond. If the bond company (bond issuer) defaults and has not enough money to pay, the bondholders can take the collateral and sell it off to recover as much money as they can.

Tenure : 5 years
This refers to the maturity period of the bond. The investor will get back the bond principal amount after 5 years.

Coupon : 4.35%
This refers to the percentage of the yearly coupon payment. In this example, the bond investor will get $4.35 for every $100 par amount.

Indicative YTM : 4.18%
YTM means Yield to Maturity. The calculation for the Annualized Yield % until the bond matures. In this example, the investor will get an indicative annualized return of 4.18%. The actual amount will depend on the bond market prices.

Indicative Price : 100.78
This is the price a new investor need to pay to acquire this bond. Although the par amount is $100, the current market price is $100.78.

A price higher than par amount is known as Premium bond. A price lower than par amount is known as Discount bond.

Below is the screenshot of the TVM calculator to find the estimated Yield to Maturity of this bond. Enter the details and click on the RATE button to check the Yield to Maturity rate. The slight difference may be due to round off error.

For more related articles:

230) Differences between investing into Bond Market vs Bond Fund http://highlevelrules.blogspot.com/2019/07/330-bond-market-vs-bond-fund.html

222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html

22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html