Introduction to Bonds (Part I)
1. Principal: This is the face value of the bond; the amount that
the first bond buyer initially loaned to the company or government
issuing the bond. This is also known as the par value.
2. Coupon Payment: This is the numeric amount of interest
payments that are scheduled to the bondholder. For instance, if a bond
pays an investor $3,000 twice per year, the coupon amount is $3,000.
3. Yield: The yield is the sum of coupon payments in a year
divided by the amount paid for the year. For instance, if a bond buyer
pays $100,000 for a bond, and the bond issues 2 coupon payments of
$3,000 per year, the yield is 6% (2*3,000/100,000). This is also known
as the bond equivalent year, or the annualized yield.
4. Maturity Date: The maturity date is the date that coupon
payments will end, and the original principal will be repaid. For
instance, if a bond with a principal of $100,000 and bi-annual coupon
payments of $3,000 has a maturity date of January 1, 2040, that means
the bond will no longer issue coupon payments, and will give the
bondholder the $100,000 that was initially borrowed, on January 1 of
5. Call Date: If a bond has a call date(s), that means the
government or corporation issuing the bond has the option of paying back
the principal and ending coupon payments on the call date --- which is
scheduled before the maturity date specified. For instance, if a bond
with a maturity date of January 1, 2040 has a call date of January 1,
2027, that means the bond issuer can pay back the principal in 2027 and
no longer make any have payment obligations related to the bond.
Now that we understand the basic jargon, we are one step closer to
incorporating bonds into our income investment strategy, which we'll
continue to focus on in this series.
Introduction to Bonds (Part II)
Step Coupon Bonds: These are bonds whose coupon rates increase
over the duration of the bond. Often these bonds start by yielding below
what similar bonds do, but end up with a higher than average yield. It
should be noted that many step coupon bonds are callable, and have a
call schedule that mirrors the step coupon rate schedule. In other
words, instead of paying the higher interest rate when it may be due,
the bond issuer has the right to call the bond (return the par value to
Putable Bonds: These bonds allow the bond holder to redeem them
at face value pre-defined intervals. Putable bonds are basically the
inverse of callable bonds. Bondholders typically pay a premium for
putable bonds, which is another way of saying that the coupon rate on
putable bonds is lower because of the buyer is essentially paying for a
put option on the bond in addition to the bond itself.
Tax Status: Various bonds have different tax implications. For
instance, many government bonds around the world allow interest-income
to be tax-free, while corporate bonds are often taxed as ordinary income
is (it should be noted that tax rules are subject to the jurisdiction
one is in, as well as their own personal situation). When comparing
bonds, understanding the tax implications can provide a complete picture
on the yield that the bond will actually provide.
Survivor's Option. Survivors option bonds are those that, in the
event the bondholder passes away, allows the beneficiary to inherit the
bond with the option of redeeming it at par value. Bonds with a
survivor's option often have many conditions -- i.e. how jointly held
bonds are handled if one bondholder passes away, proof of death and
inheritance rights that must be provided, time limits on providing this
proof, limits the amount of the survivor's option --- and thus it is
paramount for bondholders with survivor's options to read the fine
print. Survivor's options are usually of interest to large estates that
are handled by professional executors.
Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2019.02.07 11:34
Your Bond Strategy For 2019 (based on the article)
Chart was made on MT5 with Brainwashing system/AscTrend system (MT5) from this thread (free to download) together with following indicators:
Same system for MT4: