In this chapter, you will delve into the fixed-income marketplace and explore the rationale for using fixed-income securities. You will familiarize yourself with the terminology related to bonds, debentures, and other types of fixed-income securities and learn to distinguish among the securities used by governments and corporations. Furthermore, you will understand how to read bond quotes and ratings.
LEARNING OBJECTIVES
- Describe the fixed-income marketplace and the rationale for issuing debt securities.
- Define the terminology, main features, and characteristics of various fixed-income securities.
- Summarize the features and characteristics of Government of Canada securities.
- Summarize the features and characteristics of provincial and municipal government securities.
- Summarize the features and characteristics of corporate bonds.
- Summarize the features and characteristics of other fixed-income securities.
- Interpret bond quotes and ratings.
CONTENT AREAS
- The Fixed-Income Marketplace
- The Basic Features and Terminology of Fixed-Income Securities
- Government of Canada Securities
- Provincial and Municipal Government Securities
- Types of Corporate Bonds
- Other Fixed-Income Securities
- How to Read Bond Quotes and Ratings
KEY TERMS
Definitions of the key terms are available in the glossary. Key terms that appear in bold text within the chapter include:
- after-acquired clause
- equipment trust certificate
- par value
- bankers’ acceptance
- Eurobond
- premium
- bond
- extendible bond
- principal
- bond residue
- callable bond
- first mortgage bond
- purchase fund
- call protection period
- fixed-income securities
- real return bond
- Canada Premium Bond
- floating-rate securities
- redeemable bond
- Canada Savings Bond
- forced conversion
- retractable bond
- collateral trust bond
- foreign bond
- serial bond
- commercial paper
- foreign pay bond
- sinking fund
- conversion price
- guaranteed investment certificate
- conversion privilege
- strip bond
- index-linked notes
- convertible bond
- subordinated debenture
- instalment debenture
- coupon rate
- term deposit
- liquid bonds
- debenture
- term to maturity
- marketable bonds
- debt security
- Treasury bill
- market price
- trust deed
- denominations
- variable-rate securities
- maturity date
- discount
- yield to maturity
- mortgage
- domestic bond
- zero-coupon bond
- negotiable bonds
- election period
Key Takeaways from Chapter 6
- Learn about the fixed-income market and the reasons for issuing debt securities.
- Understand different types of fixed-income securities including both government and corporate bonds.
- Get acquainted with the bond market terminology and features.
- Gain insights into reading and interpreting bond quotes and ratings.
Frequently Asked Questions (FAQs)
What is a fixed-income security?
A fixed-income security is a type of investment that provides returns in the form of fixed periodic interest payments and the eventual return of principal at maturity.
How does a bond differ from a debenture?
A bond is typically backed by secured collateral, while a debenture is not secured by specific assets but is backed only by the issuer’s creditworthiness.
Why do governments and corporations issue fixed-income securities?
Fixed-income securities are issued to raise funds for projects, operations, and other financial needs while offering investors a relatively stable and predictable return.
How can I read bond quotes and ratings?
Bond quotes and ratings provide important information about the price and the creditworthiness of the bond issuer. Quotes are often expressed as a percentage of the bond’s par value, and ratings are assigned by credit rating agencies based on the issuer’s reliability.
Additional Learning Resources
📚✨ Quiz Time! ✨📚
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## What is the primary purpose of issuing debt securities in the fixed-income marketplace?
- [ ] To enhance stockholder equity
- [ ] To increase market volatility
- [ ] To raise the company's share price
- [x] To raise capital for governments and corporations
> **Explanation:** Debt securities allow governments and corporations to raise capital needed for various expenditures without diluting ownership stakes.
## Which of the following is NOT a main feature of fixed-income securities?
- [ ] Principal
- [ ] Maturity date
- [x] Dividend yield
- [ ] Interest rate or coupon
> **Explanation:** Fixed-income securities typically involve features such as principal, maturity date, and interest rate or coupon, whereas dividend yield is associated with equity securities.
## What is a bond's par value?
- [ ] The market price of the bond
- [x] The face value of the bond
- [ ] The varying interest rate of the bond
- [ ] The bond's yield to maturity
> **Explanation:** The par value, also known as face value, is the nominal value of a bond that will be paid back to the bondholder at maturity.
## What feature of a bond ensures that it has protection against early redemption by the issuer?
- [ ] Collateral trust bond
- [x] Call protection period
- [ ] Convertible bond
- [ ] Foreign pay bond
> **Explanation:** A call protection period prevents the issuer from redeeming the bond before a specified date, giving bondholders some assurance on their investment period.
## Which type of bond allows bondholders to convert their bonds into a predetermined number of shares of the issuing company?
- [ ] Callable bond
- [ ] Zero-coupon bond
- [x] Convertible bond
- [ ] Floating-rate securities
> **Explanation:** Convertible bonds provide bondholders the option to convert their bonds into shares, allowing them to benefit from future stock price appreciation.
## What are Treasury bills commonly known as?
- [ ] Callable bonds
- [ ] Serial bonds
- [x] Short-term debt securities
- [ ] Eurobonds
> **Explanation:** Treasury bills are short-term debt securities issued by the government that typically mature in a year or less.
## What type of bond adjusts its payments based on the inflation rate?
- [ ] Callable bond
- [ ] Zero-coupon bond
- [ ] Eurobond
- [x] Real return bond
> **Explanation:** Real return bonds, or inflation-indexed bonds, adjust interest payments based on inflation rates to protect the purchasing power of investors.
## Which type of bond can be paid off by the issuer before its maturity under specific conditions?
- [ ] Serial bond
- [x] Redeemable bond
- [ ] Mortgage
- [ ] Commercial paper
> **Explanation:** Redeemable bonds can be repaid by the issuer before maturity date, providing the issuer some flexibility in managing debt.
## What is the primary characteristic of zero-coupon bonds?
- [x] They do not pay periodic interest but are sold at a discount to par value.
- [ ] They provide high coupon rates.
- [ ] They can be converted into shares.
- [ ] They pay floating interest rates.
> **Explanation:** Zero-coupon bonds are sold at a discount to their par value and do not pay periodic interest. Instead, the bondholder receives a lump sum at maturity.
## What key factor does "yield to maturity" represent in bond investing?
- [ ] Face value of the bond
- [x] Total return anticipated on a bond if held until it matures
- [ ] Periodic interest payments
- [ ] Borrower's credit rating
> **Explanation:** Yield to maturity represents the total return an investor can expect to earn if the bond is held to its maturity date, including all interest payments and any gain/loss if the bond was purchased at a discount or premium.
In this section
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6.1 Introduction to Fixed-Income Securities
Discover the essentials of fixed-income securities, their significance in financial markets, and the critical terminologies involved.
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6.2 Fixed-income Marketplace
An in-depth guide on the fixed-income marketplace, the rationale for issuing debt securities, different types of fixed-income securities, their characteristics, issuers, and taxation.