Yields On Corporate Bonds - Nominal, Yield To Maturity

Yields on Corporate bonds are typically higher than other types of debt securities. The Yield to maturity is based on the nominal coupon rate and price paid. Since Corporates are not backed by a Government or municipality like Treasuries or Municipal bonds, their overall yield is normally higher.

Nominal Yield

This is the coupon rate on the bond when it first comes to market.

From American Investment Training: "This bond interest rate is what the issuer pays to par value (amount of bonds owned). It is fixed and never changes during the life of the investment. This is different than the yield to maturity or the current yield if the price paid for the security is lower or higher than par." More on Understanding Nominal Yield.

The Yield To Maturity

This is the real rate of return for a corporate bond since these are fully taxable, there is no tax free yield like you would see with muni bonds. The YTM may not be realized if the bond is callable. This is a very important factor with corporate bond yields. If the debt is called early, that could increase or decrease your yield based on the call date and the call price.

Other Factors that can affect yield on corporate securities

Length of Maturity

Rating

Yield Curve and current interest rates

As of this writing, yields on all bonds have been at historic lows for some time, so most investors have turned to high yield bond funds or individual stocks and equities.

But for investors who prefer safety and certainty of maturity and principal returned, corporate bonds offer the best pure debt yields. Your overall Yield to maturity and nominal yield will be higher with lower grade - rate corporate issues. Investment grade down to "Junk Bonds" - which is the real term for "high yield bonds" is where the best corporate bond yields can be had

For a greater detailed look at yields of all types for all bonds, please visit Bond Yield Blog

Corporate Bond Quotes

Corporate bond quotes are found on the exchanges or on the Yellow Sheets publication. The YELLOW SHEETS are a daily list of all Over-the-Counter or OTC, (bonds not listed on the NYSE), corporate bonds and are published by the National Quotation Bureau . The list has some quotes from the previous day, but for the most part, the Yellow Sheets are simply information sheets that tell the trading desk which various broker/dealers are willing to trade the particular OTC bond. With the advent of computer data services that provide most of the information about bond inventories, the National Quotation Bureau has moved to providing the Yellow Sheets in an electronic “real time” version. Corporate bonds that trade on the New York Stock Exchange and other exchanges are not found in the Yellow Sheets because they trade on the floor of the exchanges. Three other publications list OTC securities information and inventory availability for stock: Pink Sheets , White Sheets , and Green Sheets.

Managing a Corporate Bond Portfolio - How to Manage Investment Bond Portfolio

We offer very suggested reading on the dynamic world of corporate portfolio management. 5 star average views. A great tool and learning to earn at your fullest Bond Broker or Investor potential.

Corporate bond portfolio management is a complicated process of balancing risk and expected returns. In managing this type of portfolio, you must account for a variety of factors that could impact the corporate bond market and, most importantly, the expected return of your portfolio. Managing a Corporate Bond Portfolio presents the essential elements of corporate bond portfolio management and provides you with state-of-the-art analytical tools to help enhance returns and control the risks associated with corporate bonds.

Fixed income security experts Leland Crabbe and Frank Fabozzi begin with an overview of corporate bond features, including the provisions contained in bond indentures, secured bonds and unsecured bonds, and interest payments. They also provide a solid foundation of the various corporate debt structures of corporate bonds.

Moving from introductory basics to the sophisticated analysis of returns and risk of corporate bonds, Managing a Corporate Bond Portfolio offers portfolio managers and investors the most professional advice, insights, strategies, and tools to maximize corporate bond portfolio returns while minimizing risk. An in-depth discussion of corporate bond valuation and price dynamics provides you with: * A valuation framework, as well as various measures of corporate bond yields and spreads * The most current measures of interest rate risk * Useful formulas that reveal the relation between spreads and excess returns * Strategies that can improve performance by anticipating changes in yield spreads and spread curves * A thorough understanding of the fundamental factors that drive corporate spreads. . . and much more.

Managing a Corporate Bond Portfolio continues its comprehensive treatment of corporate bond portfolio management by discussing corporate credit risk issues such as the microfundamentals of credit risk and credit analysis; measuring expected excess returns based on credit rating transition probabilities; and valuing subordinated securities. Rounding out the topic of corporate bond portfolio management, Managing a Corporate Bond Portfolio presents an analytical framework for valuing embedded options, and explores redemption analysis through an examination of how option values are affected by credit risk, and the valuation of putable bonds and their use in portfolio strategies.

Corporate bond portfolio management is a dynamic process in which investors continually reevaluate which sectors of the market have the most attractive trade-off between risk and expected return. With Managing a Corporate Bond Portfolio you'll learn to combine the many aspects of this discipline to create a portfolio that will put you in the best possible position to enhance returns in the corporate bond sector. From the Back Cover Praise for Managing a Corporate Bond Portfolio

"Crabbe and Fabozzi's Managing a Corporate Bond Portfolio is a refreshingly good book on the neglected topic in fixed income portfolio management. If you want to understand the latest thinking in corporate bonds, what drives prices and why, read this book. You will emerge with knowledge that will help you get an edge in the competitive investing arena." -Tim Opler Director, Financial Strategy Group, CSFB

"A practitioner's guide . . . a creative, comprehensive, and practical book that addresses the myriad of challenges facing managers of corporate bond portfolios. The chapter on liquidity, trading, and trading costs is a must read." -Mary Rooney Head of Credit Strategy, Merrill Lynch

"As a Senior Portfolio Manager responsible for managing billions of dollars invested in fixed income product during the mid-1990s, Lee Crabbe was the one Wall Street strategist that I would read every week to help me figure out where value was in the corporate bond market, and for insightful and easy-to-understand special reports that educated me and most investors on the risks and opportunities inherent in new structures and subordinated products. Fortunately for me and investors, Lee Crabbe and Frank Fabozzi have written this book, which compiles much of their previous work on corporate bond valuation, along with new features that are a must read, especially in light of the volatile times in the corporate bond market over the past few years. For portfolio managers, analysts, traders, and even strategists, if there is one book in your bookshelf that you should have on corporate bond portfolio management, it is this one." -William H. Cunningham Managing Director, Director of Credit Strategy, J.P. Morgan Securities Inc.

CMO Investing - CMO Bonds, Basics and Bonds

A Collateralized Mortgage Obligation (“CMO” or “REMIC”) is a series of bonds, backed by a pool of US Agency issued Mortgage-Backed (MBS). CMO’s have many of the same characteristics as Mortgage Pass-Though Securities including the safety of U.S. Government assurances and a AAA rating, the liquidity of an active secondary market, a yield significantly higher than comparable government securities, and monthly cash flows. However, CMO’s have three distinct advantages over “traditional” Mortgage- Backed Securities:

1. CMO’s offer more stable and predictable cash flows 2. CMO’s offer a choice of principal repayment schedules as principal payments beginning immediately, or principal payments deferred) 3. C MO’s offer a choice of maturities; short, intermediate, or long term.

Learn More: CMO Investing Basics - with free links, tutorials and trading tips

0 coupon bonds - zero coupon securities

Bonds that do not pay a rate of interest when they are issued but pay par at maturity are considered zero coupon bonds.

Issuers of 0 coupon securities include:

U.S Government Treasury Bills U.S Government Agencies Municipalities (Municipal Bonds) Corporate Bonds

Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified. However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk is even less realized.

Learn more about: Zero Coupon Bonds with helpful links and trading companies

Converting Bonds

Converting a bond is based on par value and the fixed conversion price that appears on the bond. The conversion price is not the price the stock is purchased at. So, it is unlike a "Stock Option". The time to convert is the investor's choice. An example:

A customer owns ABC convertible bond that is selling in the market at $1040 or $104, the common stock is selling at $54 and the conversion price is $50. The investor would like to convert, but will only do so when the stock value is trading above the bond value. "Parity" would occur when the bond and stock are equal. The first thing you must find out is the amount of shares the customer is entitled to. We get that by dividing the conversion price into the par value of the bond ($1000). $1000 divided by 50 equaly 20.

The investor can convert out of the bond into 20 shares of stock - no more no less. The stock is currently trading at $54, so the the stock value is found by multiplying 20 (shares) by $54 (stock value), which equals $1080. $1080 is above the bond selling price of $1040, so converting at this time would meet the customer's objectives of converting only when the stock value was above bond value or "above parity".

Pricing Convertible Bonds - The Convertible Bonds (CB) market is growing all the time. To date, over one trillion dollars worth of CBs are in circulation. Corporations are finding this source of fund-raising more and more attractive. And for different reasons, the buyers are finding CBs increasingly attractive investment vehicles.

There are few works on the subject of pricing convertible bonds. Most books discussing derivative products cover all details of pricing futures and options in minute detail. Convertible bonds and warrants are usually mentioned as an after thought in the latter chapters. This is the first book to address the very complex issue of pricing convertible bonds.

Who Owns Corporate Bonds?

With the current debt and interest rate conditions - I was wondering who is holding corporates now. The junk bond market was always a good play for most investors as there were very few defaults.

I think the Stock Market will be down another 10% by year end. Just my opinion. Seeing where others are at with this.

Nick
American Investment Training
Financial Glossary

Agency Bonds

Types of Agency Bonds

Straight Debt Obligation - These bonds are backed by the full faith and credit of the agency and generally pay interest from a nominal yield every 6 months with a fixed maturity where the par value is redeemed. These are typical structures that are common in other forms of issuers, such as corporations and municipal issuers.

Pass Through Securities - These bonds are backed by the full faith and credit of the agency as well, but the payments and eventual pay-off rely on the paying back of mortgage payments issued through the agency. Ginnie Mae or another mortgage issuing agency could issue a pass through to fund the issuance of mortgages to a group of people. As the homeowner pays back principal and interest back to Ginnie Mae, Fannie Mae or whoever - the bond holders are paid.

Pass Through Bonds or Mortgage Backed Securities are normally issued as 30 year bonds, but the prepayments made by the mortgage holders or changes in interest rates will effect the speed of the payments made on the bonds. The holders will receive monthly principal and interest until their share in the bond is completed.

These bonds have a large amount of prepayment (paying too fast) or extension risk (paying too slow), because changed in interest rates, will have a potential volitile impact on the performance of the bond.

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CMO Bonds

Collateralized Mortgage Obligations differ from pass through securities in that they have different types of paying bonds within the CMO. There are many types and tranches to evaluate - each with it's own bond risk.

A CMO has different payment timing risk depending on the type of bond you own. Some offer more protection than others from prepayment or extension risk. These bonds have a more predicatable duration to the bondholder vs. a pass through agency bond. Some CMO's can pay off faster than others.

Learn much more on investing and trading these bonds. Free Info through American Investment Training

CMO INVESTING PAGE

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Stocks that do not trade on an exchange and are priced at $5 or less are known as penny stocks. Buying or investing in these stocks carries more risk than other securities, as they are normally new or emerging companies and the trading ability of them is usually limited to a fewer number of brokers who can fill penny stock trades.
These investments do not trade on the NYSE, AMEX or any other actual stock exchange. They also do not trade on NASDAQ. The trading, buying and investing of these shares is done through an Over The Counter market of firms acting as market makers. These market makers are brokerage firms that own or can readily provide the shares to investors and broker dealers.

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Euro Bond Market

The Eurobond marlet is larger than the U.S Corporate bond market. The Euro Dollar center is in London, where most of the trading is. This bond market is either denominated in U.S dollars or in foreign currencies like the Euro.

Many Eurobonds are Eurodollar bonds.

Some foreign investors prefer Eurodollar issues because the maturities range from 5-10 years which is shorter and they have better bond call protection than many US bonds.

Euro bonds are also not subject to witholding tax on interest earned.



Most Eurodollar bonds are traded in bearer form.

These securities normally pay once per year. US based corporate and agency bonds normally pay semi annually.

Euro dollar bonds do not have to register with the SEC, where corporate securities are not exempt.

Book Recommendation - Fixed Income Securities: Tools for Today's Markets, Second Edition, University Edition

Euro Issue With the rapidly rising index and foreign funds investing heavily in the Indian market, the corporate sector has seen a massive surge of profits in the recent past. India is now the largest recipient of non-resident transfers in the world. The Indian government has introduced an alternative means for the Indian entities to raise funds from the international markets by way of the Bonds Issue. The most common facet of this bonds issue is the foreign currency convertible bonds, which are open to the foreign markets by making regular coupon and principal payments and also giving the foreign bondholder an option to convert the bond into stock when the market fluctuations favour them.

In addition there has also been a significant liberalization of Indian investment abroad and relaxation of policies regulating foreign investments in India, increased access to external commercial borrowings by Indian companies and major participation by the foreign institutional investors in the domestic stock markets. India is the 7th largest and 2nd most populous country in the world. It is also the 4th largest economy in the world. A number of monetary reforms stimulating foreign investment has moved India firmly into the front-runners of the rapidly emerging markets at the international scenario. Meaning of Euro Issue Euro Issue is an issue of securities to raise funds outside the domestic market. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS.

The advantages associated with Euro issues are:
1. Low cost of capital owing to lower interest rates and floatation costs. 2.pricing that maximizes mobilization. 3. No change in control. 4. Greater visibility due to international exposure. 5. Inflow of foreign funds.

Euro issues must conform to the guidelines issued by the Central Government. Among other thing, prior permission for an issue must be obtained from the Ministry of Finance. Indian companies are permitted to raise foreign currency resources through issue of Foreign Currency Convertible Bonds (FCCBs) and/or issue of ordinary equity shares through Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad. A scheme had been initiated during 1992 to allow the Indian Corporate Sector to have access to the Global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/ Equity Shares under the Global Depository Mechanism (GDR) and American Depository Mechanism (ADR).Under this scheme, companies with consistent track record of good performance (financial or otherwise) for minimum period of three years were allowed to access international capital market. The three year track record requirement had been relaxed for companies making Euro issues for financing projects in infrastructure sectors like power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Foreign Currency Convertible Bonds (FCCB)

“Debt-Instrument” means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, whether constituting a charge on the assets of the body corporate or not. These corporate bonds are sometime issued as ‘convertible bonds’ with the option of being converted to equity. Bonds carrying such optional element attract the investors making debt investment in the bonds issuing entity. A bond that can be converted into a fixed amount of the company's equity is usually done at the discretion of the bondholder. Keeping in pace with the latest economic-financial trends, Indian Corporate have started issuing these ‘convertible bonds’ in international markets commonly known as ‘Foreign Currency Convertible Bonds’. “Foreign Currency Convertible Bond” (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency” When these bonds are issued in a currency different than the issuer’s domestic currency with an option to convert them in the equity of the issuer company, such quasi- debt instruments are called foreign currency convertible bonds (FCCB). The law governing is "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”. The FCCBs are exceedingly popular with the Corporate India for raising funds that are usually utilized for debt restructuring, infrastructure development and expansion plan of the Company. Generally, the investors on account of two main reasons favour such types of bonds: Firstly, receipt of fixed payments on these bonds i.e. the principal and the interest accruing on these bonds which are payable in foreign currency and secondly that these investors can avail the benefit of converting their bonds into equity during the value appreciation of the issuer company’s shares. Features: Following are some common features of the Foreign Currency Convertible Bonds: • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured. • Credit rating of Bonds is not mandatory, since corporations having excellent track record mostly issue such Bonds. However, rating done by the Credit Rating Agency certainly adds value to the bonds issued. • Indian Companies, eligible to issue shares to persons residents outside India under the Foreign Direct Investment Scheme (including Sectoral Cap and Sectors where FDI is permissible) can raise foreign currency resources aboard through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). • The ‘bond to equity’ convertible option attached to the FCCBs is subject to the Reserve bank of India guidelines. Such FCCBs can be converted by exercising the ‘Call option’ and ‘Put option’ to suit the structure of the Bond. • FCCBs are generally listed on the national and regional stock exchanges to improve liquidity. • Public issue of FCCBs shall be only through reputed lead managers in international capital market. In case of private placement, the placement shall be with banks, or with multilateral and bilateral financial institutions, or foreign collaborators, or foreign equity holder having a minimum holding of 5% of the paid up equity capital of the issuing company. Private placement with unrecognized sources is prohibited • FCCB Issue related expenses shall not exceed 4% of issue size and in case of private placement, shall not exceed 2% of the issue size. FCCB issue by the Indian Companies need to conform with various regulatory requirements: 1) Requirements as prescribed by the provisions of the Company Law: FCCBs are the bonds issued by an Indian company or any body corporate expressed in foreign currency to Non-resident investors. Such bonds fall within purview of the definition of Debentures, and therefore the process for issue of debentures shall be applicable to the issue of FCCBs. A. Prior intimation to be given to the Stock Exchange by the issuer company listed at the Stock Exchange, at least 7 days before the date of Board meeting in which the FCCB issue is to be considered. B. Power to issue FCCBs vests with the Board of Directors of the issuer Company who are obligated to pass a Board resolution pertaining to the issue of FCCBs. C. Convening a General Shareholders Meeting for procuring the shareholders consent with regard to the enhancement of borrowing powers of the Board, acquiring authorisation for creating mortgage in case of issue of secured FCCBs or obtaining shareholders approval on the further issue of the capital by way of FCCB issue, without making an offer to the existing shareholders of the company by a Special resolution. 2) Role of SEBI – Pre-issue and Post-issue requirements & Conditions to be fulfilled by the Issuer Company: • An application for listing of the Bonds has to be made to the stock exchange of the country where the FCCBs are to be issued and traded i.e. international stock exchange. • ‘In-principal’ approval has to be obtained from the Indian Stock exchange to list the shares issued upon conversion of bonds, when the bondholder exercises the convertibility option • Filing the Offer Document respectively as the Company issues these Bonds to the foreign investors in accordance with the provisions of the Trust Deed with Securities Exchange Board of India, Reserve Bank of India and stock exchanges prior to FCCB issue. 3) RBI’s Regulatory Framework:

The Government of India considers the funds raised through the FCCB issue as Foreign Direct Investment (FDI). The latest comprehensive RBI guidelines on FCCB are contained in the July 1st, 2008 Master Circular on External Commercial Borrowings and Trade Credits that provides the Scheme and Policy to be followed by the issuers of FCCB’s as the circular itself very distinctly provides that the Policy laid down for the External Commercial Borrowings are likewise applicable to the issue of FCCBs. Law Governing the FCCB issue through the ADR/GDR Mechanism:

In the recent past, some Corporate have raised funds through issue American Depository Receipts and/or Global Depository Receipts. Under such a mechanism, the companies issue shares to the depositories who in turn issue these ADRs/GDRs to the ultimate investors functioning in the international markets. For this purpose the entities issuing the ADRs/GDRs enter into an agreement with the depository to the effect that the depository would not exercise voting rights in respect of shares held by them or they would exercise voting rights as directed by the managerial authorities of the issuer companies. It may be further noted that the Indian Companies are permitted to issue Foreign Currency Convertible Bonds and Ordinary Shares through Global Depository Mechanism. The aforesaid circular further lays down that these foreign currency convertible bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”.

The Scheme further provides the eligibility conditions for issue of Convertible Bonds or Ordinary Shares of Issuing Company: a) Obtain prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India. b) Issue ADRs/GDRs, if company is eligible to issue shares to persons resident outside India under the FDI Scheme. c) Indian listed company not eligible to raise funds from the Indian Capital Market including a company restrained from accessing the securities market by (SEBI) will not be eligible to issue ADRs/GDRs. d) Unlisted companies would require prior or simultaneous listing in the domestic market, on issuance of ADR/GDRs. e) Unlisted companies already issued ADRs/GDRs have to list in the domestic market on making profit or within three years of such issue whichever is earlier. As announced in Annual Policy Statement 2009-10 and keeping in view the benefits accruing to the Indian companies, the current policy has been reviewed and it has been decided to increase the total amount of permissible buyback of FCCBs, out of internal accruals, from USD 50 million of the redemption value per company to USD 100 million, under the approval route by linking the higher amount of buyback to larger discounts. Accordingly, Indian companies may henceforth be permitted to buyback FCCBs up to USD 100 million of the redemption value per company, out of internal accruals, with the prior approval of the Reserve Bank, subject to a: i) minimum discount of 25 per cent of book value for redemption value up to USD 50 million; ii) minimum discount of 35 per cent of book value for the redemption value over USD 50 million and up to USD 75 million; and iii) minimum discount of 50 per cent of book value for the redemption value of USD 75 million and up to USD 100 million. ADRs & GDRs

ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt..Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. So the companies get listed on these stock exchanges indirectly – using ADRs and GDRs. Depository receipts Depository receipts are instruments issued by international depositories, and they represent an interest in the underlying shares held by them in the issuer company. The shares are usually held by a domestic custodian on behalf of the depositories and the depositories in turn issue the depository receipts, which entitle the holder of the receipts to get the underlying shares on demand. The depository receipts themselves, which represent an interest in the underlying securities, are in turn securities that are capable of being listed on international stock exchanges. Procedure Of Issuing Depository Receipts: ? The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or4). ? These receipts are then sold to the people of this foreign country (and anyone who are allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. ? These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders. Difference between ADR and GDR Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. 1. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. 2. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR. Users of an ADR / GDR The ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts! ADRs and GDRs are not for investors in India – they can invest directly in the shares of various Indian companies. Some of the best Indian companies have issued ADRs and / or GDRs.

Below is a partial list. VSNL , WIPRO ,Bajaj Auto Government Guidelines for Issue of Global Depository Receipt (GDRs) / American Depository Receipts (ADRs) Companies in India which have the eligibility to issue shares to person resident outside India, under the Foreign Direct Investment scheme, are generally allowed to raise equity capital in the international market by issuing rupee denominated shares to a non-resident depository for the purpose of issuing of GDRs/ADRs. This is possible with the approval of the Ministry of Finance and with reference to the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Deposit Receipt Mechanism) Scheme and in accordance with the guidelines(2009) issued by the Central Government in this regard. ? A listed Indian company, which does not posses the eligibility to raise funds in the Indian market including a company held by the SEBI, becomes ineligible to issue GDRs/ADRs. ? Unlisted companies, which have not tried the GDR/ADR route for raising its capital, would compulsorily be required to possess prior or simultaneous listing in the domestic market. Unlisted companies which have already tried GDRs/ADRs need to list in the domestic market on making profit or within 3 years of such issue of GDRs/ADRs, whichever is earlier. As per the guidelines, the GDRs/ADRs are valued and in consultation with the Lead Manager, are issued on basis of the ratio worked out by the Indian company. The proceeds from the issue are required to be kept abroad till the time it is utilised. Till such time, the proceeds may be invested as per guidelines prescribed. Indian companies do not have any restriction on the number or monetary limit of GDR / ADR / FCCB that can be floated in a financial year. Before seeking the final approval from the Ministry of Finance, a company which is engaged in the manufacture of items covered under the Automatic route would need to obtain prior government clearance through the Foreign Investment Promotion Board, if the FDI after a proposed issue of GDR / ADR / FCCB is likely to exceed the sectoral caps. Except for the express ban on investment in real estate and the stock markets, there are no end-use restrictions on the proceeds of GDR / ADR issue. Under the two way fungibility scheme, an Indian stock broker registered with SEBI can purchase shares of an Indian company from the market for conversion to GDRs/ADRs based on instructions from overseas investors. Reissue of GDR / ADR are permitted to the extent of GDR / ADR which have been redeemed into underlying shares and sold in the Indian capital market. An Indian company also has the permission of sponsoring an issue of GDRs / ADRs by offering its domestic shareholders a choice to submit their shares back to the company so that consequently, GDR / ADR may be issued abroad. Within thirty days of closing the GDR / ADR, an Indian company is required to furnish full details of such issue to the Reserve Bank of India.

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Medium Term Investing Notes - MTN Finance

Medium Term Note Trading And Their Importance In A Worldwide Recession.

Private Trading of Medium Term Notes, also known as Mid-Term Notes and MTNs, is essentially capital raised for the purposes of the development of working capital and the upward trend towards strengthening a company's balance sheet. More times than naught, private trade programs encompass the development of new products, technologies and overall expansion. Whereas in this article, In the broad sense and in the most known categorization, we will be discussing Medium Term Note Private Trading which is a completely different investment channel generating tremendous returns for small and large, individual and corporate investors alike.
Investors have limited access when it comes to educating themselves and investing in the high-yield arena of MTN Trading. Unless they have liquidity in the hundreds of millions, most others who have less liquidity for investment find themselves on the outside trying to get a peek in. In this article, the general development of knowledge with regard to private trading, MTNs, BGs and other instrument facets, will explain why and where individuals willing to invest from $10M on up can participate in the world of Medium Term Note Trading.

Why is there such a demand for investing in Private Programs that utilize MTNs and on occasion Treasury Bills?





Since the mid-1990's to the present day, Medium term Note originations total investment dollars have escalated from a estimated, yet traceable, phase of just over $10 billion dollars in mid-1990s to a current level of well over $75 billion dollars through the third quarter of 2008. There have been roughly 6,500 private trade programs done through the third quarter of 2008. Companies in the likes of Sony Capital, Harley Davidson, LG and other well recognized entities have all offered Mid-Term Notes collateralized by their assets for expansion and development. From a low of fewer than 2,500 in all of 1996, you can see that the interest towards Private Trading gains when markets and the economy as a whole degrades catapulting the need for short term, well secured notes backed by established corporations, banks, asset holders and countries.

Hedge Funds, Portfolio Managers and Private Investors are often attracted to these Private Programs and understand the rules and guidelines that follow. Less experienced, smaller investors tend to be dismissed due to the anxiety levels and continuous pestering of updates. High-net worth, seasoned investors have their blocked funds almost always are combined with other clients to build a larger trade bases, if individually large enough, say one billion and up, enter into a Private Trade Program by themselves; however they too may very well be bundled with other client assets to reduce the number of trades being managed. Their blocked funds represent these MTN Trade Programs and are a tremendous economic incentive in their own right by the generation of liquidity by the function of process.

The derived profits most often than not, as well as the leveraged amount of the blocked funds, will go into further capitalization of new companies believed to have significant growth possibilities in industries such as: healthcare, bio-technologies, software/hardware and telecommunications. These Private Trade Programs add value to these companies and further compel advancements in those particular sectors.

Without Medium Term Notes, the potential of utilizing them in Private Trading and the profits derived from such, many of the participants of these programs would never launch over the first tier with regards to the programs they are included in.

Typical Minimum Investment Requirement: Mid-Term Note Trading and investing is not easily accessible to the typical high-net worth investor or well capitalized corporation unless they first know these types of programs exist and then are either introduced to the trading platform from a referring client or through a series of referral educational sites where the client can thereafter request admission. Most Trade Programs typically will accept investors who are willing to commit as little as $25 million to have blocked for the purposes of leverage. Although some Trade Managers have dropped their minimums to only $250K with coupled by a series of A,B,C programs to ramp up the clients capital to higher level trades.

Fund of Funds: A fund of funds holds the leveraged funds of many private partnerships that invest in private trades. It provides a way for firms and individual participants to increase cost effectiveness and thereby reduce their minimum investment requirement. Since a fund of funds is leveraging against those original funds, sometimes up to 20 to 50 times, the accumulated return for that specific funds of funds becomes much more lucrative.

In addition, because of its size and diversification, a fund of funds has the potential to offer greater returns than you might experience with an individual MTN Trade Program. This only holds true to those Programs that are under the $100 million dollar level though since most times the lesser amounts are leveraged through funds of funds or equivalent means.

The main disadvantage, if it could be considered such, is that there is an additional layer of fees paid to the fund of funds manager. Though typically $100 million and up will roll out the welcome mat, investors can on occasion, participate with $250,000 - $10 million to the respective fund of funds manager. For those smaller amounts under $10 million, the platform manager may not let you participate unless you are an accredited investor with a net worth between $1.5 million to $5 million.

Is it worth the time and consideration? There are several key risks in any type of investing since you essentially, with any investment, can guarantee a return (except for low yielding T-Bills, etc.) Private Trading is no exception. As mentioned earlier, the fees of Private Trade Programs that cater to smaller investors can be higher than you would normally expect with conventional investments, such as mutual funds. With a pre-established historical return rate on these smaller (less than $100M) funds may be in the double to triple digits as reflected in previous scenarios. The promulgation of these fees are irrespective and of little consequence to the investor although many investors feel that they deserve more, do essentially doing very little.

In a market as volatile as the one we currently face, it is much harder to find streamlined programs that offer little risk. Transferring of investors' funds is not evidenced in these Private Trade Programs that are at or above $10 million dollars. A block is placed on the client's funds within their account for the duration of the trading period. Hence, the safety the client experiences remains secure with the leveraged program they enter into.

Investment Grade Bonds - Moody's, S&P Grade

A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's or BBB(low) or higher by DBRS. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.
Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets, i.e., the amount of interest they pay on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for issuers' borrowing costs.

Bonds that are not rated as investment-grade bonds are known as high yield bonds or more derisively as junk bonds.

The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered noticeably higher than in the case of first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. It is an indicator for the market's belief in the stability of the economy. The higher these investment-grade spreads (or risk premiums) are, the weaker the economy is considered.

TradingSolutions: Financial analysis and investment software that combines technical analysis with neural network and genetic algorithms.

What You Might Not Know About Bonds

If you are new to investing perhaps you are not familiar with bonds. Before you get started, you need to understand some of the risks associated with bond investing. Most people assume that all interest-bearing securities are completely risk free, but this is not the case. Even if you know a lot about investing, you may not be aware of some of the risk characteristics associated with bonds.
The most important thing to take into account is the interest rate. The Federal Reserve (also known as the Fed) meets every 6-8 weeks to evaluate the health of the economy. At each meeting, the Fed renders a decision regarding interest rates.

If inflation is rising, the Fed will need to raise interest rates to tighten the money supply. If inflation is moderate or contained, the Fed will likely leave rates unchanged. However, if the economy is slowing down and there is very little inflation or maybe even deflation, then the Fed might decide to reduce interest rates to create a stimulus for economic growth.

The reason why you need to consider present and future interest rate levels is because as interest rates increase, bond prices go down, and vice versa. If you are able to hold your bond until maturity, then interest rate movements do not really matter, because you will redeem the principal upon redemption. But often, investors have to cash out their bonds well before the maturity date. If interest rates have moved up since you purchased the bond, and you sell it prior to maturity, then the bond will be worth less than your initial investment.

You should also be aware of the claim status of the bond you are buying. Claim status refers to your ability to liquidate your investment in the event the bond issuer goes bankrupt. If you are buying a government bond, such as a Treasury Bill, claim status is irrelevant, because the odds of the Federal Government going bankrupt are slim and none.

If you are buying a corporate bond, however, there is always a chance that the issuer could go out of business. In the event of liquidation, bondholders are given priority over stockholders. However, there are often different classes of bondholders. Senior note holders can often claim against certain kinds of physical collateral in the event of bankruptcy, such as equipment (computers, machines, etc.). Regular bondholders can not always claim against physically collateral, and are next in line after the senior note holders.

Next, you should always check the three main features of the bond you are buying; the coupon rate, the maturity date, and the call provisions. The coupon rate is the interest rate. Most bonds pay an interest rate semiannually or annually.

The maturity date is the date that the bond will be redeemed by the issuer; simply put, the maturity date is when the company must pay back to you the principal you loaned to them. The call provisions are the rights of the issuer to buy back your bond prior to maturity. Some bonds are non-callable, while others are callable, meaning that the company can buy your bond back before maturity, usually at a higher price than what you paid.

Finally, you should also understand that if economic conditions become more favorable after you a buy a bond, and interest rates start to go down again, the issuer will likely issue a lot more bonds to take advantage of the low interest rates, and will use the proceeds to try to buy back any callable bonds it issued previously. So, when interest rates go down, there is an increasing likelihood that your bond will be redeemed prior to maturity, if in fact the bond is callable.

You should invest in bonds. However, you should also take into account the risk factors we have covered. Your portfolio should contain a mix of corporate, federal, municipal, and even junk bonds (there is always a default risk associated with junk bonds, but they pay a huge interest rate). Talk to your broker about diversifying the kinds of bonds in your portfolio and you will reduce your overall risk and maximize your return.

Jim Pretin is the owner of www.forms4free.com

Yield Curve Spreads - Treasury Yield vs. Corporates

Corporate bonds trade at spreads above the corresponding treasury security of the same maturity range on the curve. Basis point spreads are how they trade. Since corporate bonds have more credit risk than treasury notes and bonds, they will sell at higher yields.

When interest rates are very low, or when the yield curve is flat or inverted, these spreads on corporates can thin. This is mostly true with the higher credit quality of corporate bonds rated A or better.

If a 10 year treasury is at 2.5%, a corporate bond may be at 2.85% of a high quality. Lower grade bonds or junk bonds will have higher spreads as their credit quality is less.

Attractive spreads over treasuries is what professional or seasoned traders look for. As interest rate environments change, these levels will adjust. This market is changing every minute.

Recommended Reading:

Corporate Bonds: Structure and Analysis

Managing a Corporate Bond Portfolio

Trading and Selling Corporates

Corporate debt is traded mostly in the over the counter (OTC) market. There are also bond trades and selling on the NYSE (New York Stock Exchange).

NASDAQ quotes convertible corporate bonds since they are similar to stocks and equities, but they do not quote non convertible corporates.

Round lot trades of bonds is 5 $1000 par bonds = $5000

Yellow Sheets - Bond dealers get printed offering quotes for corporate bonds in the yellow sheets, which are printed daily. There are electronic pricing services as well.

Bloomberg and TRACE. TRACE offers real time reporting of corporate bond trades.

Commercial Paper is sold OTC through dealers and can also be bought through the issuing corporation.

Corporate bonds settle trade day plus 3 business days T+3 for buying and selling.

Regular was trading is trade date plus 3 business days.

"When Issued"

When a corporation announces it will sell new securities. The exchanges will allow trading in the bonds before they exist. If the issue never comes out or sells, then the trades are canceled.

Bond Trading Yield

Junk Bond - Junk Notes

Corporate bonds that are rated below investment grade are considered junk or speculative. Standard and Poors and Moodys are 2 rating agencies that will rate the credit quality of corporate notes and bonds.

A bond that has a rating of below Baa/BBB are considered speculative. The reality is over 95% of these securities pay off fine, but because of their junk rating (pretty strong word), they will offer a higher yield or rate of return. So, the majority of investors buying these bonds will earn more money than investors who only buy AAA or high rated corporate bonds and notes.

There are domestic and foreign issues of speculative bonds. Some of these securities are also callable and/or convertible. A callable junk bond will have a set call date that the issuer can redeem the bonds back early at. There will be a set call price on these securities as well. Normally a junk bond is called when interest rates have declined to a certain level. Thus, the investor will get their money back when interest rates are low. Callable bonds will have a higher yield than non callbale bonds if the quality is the same and the maturity is as well.

Convertible junk bonds are securities where the investor can convert into common stock of the issuing corporation.

Convertible Bonds
Subordinated Debentures

Bond Yield Spreads

Spreads on corporate bonds are normally priced above the treasury note or bond of the same maturity. These spreads on yield are quoted in basis points.

1 percentage point in yield or interest rates equals 100 basis points. If the 5 year treasury note is at 4% and AA corporate bonds are priced at 50 basis points over the treasury - the yield on the bond would be 4.50%.

Spreads on corporate debt securities are different based on the rating of the bond. AAA rated fixed income debt would trade at a lower or thinner spread than a BBB rated bond - over the same treasury maturity.

Since private equity debt like corporates are of lesser credit quality than US Government securities, they will always have spreads over them. During times of lower interest rates and yields - these spreads can tighten.

Yield To Maturity

Income Bonds

Securities that only pay interest when the issuing company earns enough income are known as adjustment or income bonds.

They tend to trade like 0 coupon bonds because their interest is no longer timely or predicatable. For companies in restructuring, income bonds allow the corporation to not completelt default on the investments, but allow them time to make up the interest to the investors.

These are speculative bonds or junk bonds during this period. Investors generally hold income bonds in hopes that the interest will soon begin. Speculators that buy them at deep discounts can realize a potential profit on the debt later on should interest rates fall or the bond begins to perform well - rate of return wise.

Income or adjustment bonds should be fully understood before investing in them or placing them a portfolio. Higher risk bond funds may have a substantial amount of adjustment bonds in their managed portfolio.

http://www.aitraining.com/fglossary.htm - Over 50 complete discussion definitions of key investment products.