Covenants are legally enforceable rules that parties (borrowers and lenders) agree on. The purpose of covenants is to protect bondholders by providing some assurance on what the bond issuer will and won’t do over the bond’s life. There are two…

Fixed-income securities depend on laws and regulations of the place of issuance, where bonds are traded, and the holders of bonds. National and Foreign Bonds National bonds are issued and traded in a country. Domestic bonds are issued by local…

Plain Vanilla or Bullet Bonds The most common payment structure is a plain vanilla bond with periodic, fixed coupon payments and a lump-sum payment of principal at maturity. Plain vanilla bonds are very common for government and corporate bond issuances….

Call Provisions A call provision gives the issuer the option to repurchase the bonds before maturity. The issuer repurchases the bonds at the market price, at par, or at a specified sinking fund price, whichever is the lowest. Special Bond…

Contingency provisions allow for some conditional actions. They grant the issuer and/or the bondholder rights but no obligations to exercise specified actions. Types of bonds with embedded options are callable, putable, and convertible bonds. Callable Bonds Callable bonds give the…

Global debt markets are three times larger than equity markets. As such, there are many ways in which we can classify bonds. Classification by Type of Issuer The three bond market sectors are government and government-related sector, corporate sector, and…

Floating Rate Bonds A floating rate bond is expressed as a reference rate plus a spread or margin. The spread is usually fixed, remains constant until maturity, and it is primarily a function of the issuer’s credit quality. The coupon…

Secondary markets are “aftermarkets” where existing securities are traded among investors. The major players in these markets are large institutional investors and central banks. Below are the two main classifications of secondary markets. Organized exchanges where buyers and sellers transact…

National governments issue bonds primarily for fiscal reasons. As a result, sovereign bonds denominated in local currency have different names such as US Treasuries, Japanese government bonds, gilts in the UK, and Bunds in Germany. Treasury Securities US government bonds…