Fixed Income Fundamentals: Features

​A bond is a contractual agreement between the issuer and holder. An indenture is a legal contract describing the form and details of the bond, the obligations the bond issuer, and the rights of the holder.
 
Issuers can be classified into categories based on similarities of a peer group. Major types include (i) supranational organization, (ii) sovereign governments, (iii) non-sovereign local governments, (iv) quasi-government entities (agencies sponsored by government), and (v) companies.
 
Maturity refers to the date when issuers are obligated to redeem the bond. They do so by paying the principal amount. Tenor (or term to maturity) is the time remaining until the bond’s maturity date. Key quick notes on terms to know are listed in the following: (i) Money-market < 1 year, (ii) capital > 1 year, and (iii) perpetual bonds have no stated maturity date.
 
Par Value is the principal amount of the bond that the issuer agrees to repay at the maturity date. Coupon rate and frequency is also a critical feature to outline. For instance, a plain vanilla bond (conventional bond) pays a fixed rate of interest. Floating-rate notes (FRNs or floaters) pays a floating rate of interest. A basis point is .01%, which is another way of say 1 one hundredth of a percent. Zero coupon bonds (or pure discount bonds) do not make periodic payments and are sold at a price under the par value.
 
Currency denominations and dual-currency bonds make coupon payments in one currency and pays the par value at maturity in another. Currency option bonds are a combination of a single-currency bond plus a foreign currency option. It gives bondholders the right to choose the currency in which they receive their interest payments and principal repayments. Yield measures, such as the current or running yield, will equal the bond’s annual coupon divided by the bond’s price. Yield to Maturity (YTM) is the internal rate of return on a bond’s expected cash flows and an estimate of the bonds’ expected return.