Fixed Income Securities

 Type of fixed Income Products/fixed income securities -

1 Treasury bills (T-bills) - Short-term fixed-income securities that mature within 01 year that do not pay coupon returns.

2) Treasury Notes (T-notes) - come in mature between 02 and 10 yrs, pay a fixed interest rate, and are sold in multiples of $100

3) The treasury bond (T-bonds) are similar to the T-notes except that it mature in 20 or 30 yrs, 

4) Treasury Inflation-Protected securities (TIPS) - Protects investors from inflation.

5) A municipal bond- is similar to a Treasury,

6) Corporate bonds.

7) Junk bonds - corporate issues that pay a greater coupon. 

8) A certificate of deposit (CD) - FDR - (Max. 5yrs)

Pros and cons of fixed-income securities:

Pros:

Steady income stream

More stable returns than stocks 

Higher claim to the assets in bankruptcies

Govt. backing on some.

Cons:

Returns are lower than other investments.

Credit and default risk exposure

Susceptible to interest rate risk

Sensitive to inflationary risk.

Primary Dealers

Primary dealers are financial institutions that act as underwriters of govt. Securities in Primary auction. PD is a bank or financial institution that is approved to trade in national Securities treasury bills and bonds. The govt. collects money by selling T-Bills and Bangladesh govt. treasury bonds (BGTBS) issued through auctions. PD authorized by a country's central bank or govt. to Participate in the primary market for govt. Securities.

PD objectives:

1) To enhance liquidity and depth in the securities market by facilitating price discovery and turnover.

02) Market making - PD help to maintain liquidity in govt. securities markets by continuously quoting buy and sell price.

03) Auction Participation - Participate govt. debt auctions.

04) market insight & Feedback: Provide the central bank with insights into market conditions, which inform policy decisions, helps in making policy decisions.

 

Primary Dealers Roles & Responsibilities:

1) To enhance liquidity and depth in the securities market by facilitating price discovery and turnover.

02) Market making - PD helps to maintain liquidity in govt. securities markets by continuously quoting buy and sell price.

03) Auction Participation - Participate govt. debt auctions.

04) market insight & Feedback: Provide the central bank with insights into market conditions, which inform policy decisions, help in making policy decisions.

05) Bid and offer Quotations:  They continuously offer competitive bids and ask Prices for government securities, contributing to a more liquid and transparent market.

06) Implementing monetary policy.

07) Reporting and data sharing.

08) Compliance and regulation

09) Direct participation in government securities auction.

Coupons: A bond may or may not come with attached coupons. A coupon is stated as a nominal percentage of the par value of the bond. Coupons refer to the periodic interest payments made to bondholders. There are a key feature of bonds and are usually expressed as a percentage of the bond’s face value. Here’s a closer look- coupon rate, coupon payment, coupon frequency, coupon dates, fixed and floating coupons.

Bond Pricing:

It is an empirical matter in the field of financial instruments. It is the process of calculating the present value of a bond’s future cash flow, which consists of periodic coupon payment and the principal amount (face value) to be repaid at maturity.The key components include/bond pricing depends on several characteristics -

1) Coupon

2) Principal/par value

3) Yield to maturity

4) Periods to maturity 

Secondary Market: The trading activity happens on the Secondary market. Stocks and other securities can be traded between buyers and sellers. It is the place where investors buy and sell securities that were previously issued in the primary market. The NYSE, LSE and NASDAQ are examples of Secondary markets. This market Provides liquidity for investors and helps in price discover by reflecting supply and demand dynamics.

DIBOR: Dhaka interbank offered Rate (DIBOR) – It’s inauguration Jan- 2010 by Dr. Atiur Rahman, former governes of the Bangladesh Bank. DIBOR is the interest rate at which banks in Dhaka, Bangladesh, lend to each other in the interbank market. It serves as a benchmark for interest rates on various financial products and loans in the region. DIBOR is similar in function to other interbank-offered rates like LIBOR or EURIBOR Provides a standard reference rate for financial transactions.

Duration and convexity:

Two Strategies are used to control the risk exposure of fixed-income investments; duration and convexity. The duration gauges how sensitive the bond is to fluctuations in interest rate. Convexity refers to the relationship between an interest rate change's impact on a bond’s yield and price.

Perpetual bonds:

 It is also known as a consol bond or a perpetuity is a type of fixed income security that pays interest indefinitely and has no maturity date. It has some features like no maturity date, interest Payments, no principal repayment, Pricing, risk considerations. perpetual bonds can be attractive to investors seeking steady long-term income and are comfortable with the absence of maturity date.

Points to be consider before investing in Perpetual bonds:

(1) Liquidity (2) Asset quality and capital management of the issuer (3) Corporate governance (4) long term share price of the issuing bank (5) Inflation risk and interest rate risk (6) Repayment date risk (2) capital market exposure.

Steps to be taken by the regulator: Considering the nature of the perpetual bonds, scheduled banks and NBFIs are the major investors.

1) Ensure individual participation 2) sinking fund issue 3) CIB reporting issue

4) capital market exposure.

Principal / Par value (Face value):

Each bond must come with a par value that is repaid at maturity, without the Principal value and have no use. The principal value is to be repaid to the bondholder by the bond issuer.

A zero coupons bond pays no coupons but will guarantee the Principal at maturity.

Yield to Maturity:

Yield to maturity (YTM) is a key measure used to assess the total return an investor can expect to earn it a bond is held until maturity. A bond that sells at a Premium (where Price, is above par value) will have a yield to maturity that is lower than coupon rate.

A bond could be sold at a higher price if the intended yield (market interest rate) is lower than the coupon rate. YTM represents the internal rate of return (IRR) on the bond.