Each Fixed Income securities carries unique sets of terms depending on issuers’ and investors’ preferences
A bond is a debt security that corporations and governments use to raise capital. It provides an investor the means to loan money to an issuer for a defined period of time. In return, the investor will receive variable or fixed interest payments periodically throughout the loaning period.
Key bond terms & structures:
Collectively, these characteristics form the structure of the bond, outlining the financial, legal, and fiduciary responsibilities of the issuer to its investors and provide all relevant details regarding the issuance.
Fixed-rate coupon bonds are the most common type of fixed income securities because they provide the most stability, a key consideration for any fixed income investor. Fixed-rate coupon bond prices typically fluctuate more with the market because as the prevailing market interest rates change, the bond will become more or less attractive to investors depending on if it’s higher than or lower than the market rate. As such, the bond price will change to reflect these changes in the bond’s desirability. For example, a bond with $1,000 par value and 5% annual coupon will generate $50 a year for the investor. If the prevailing market rate is 3%, the bond will be priced higher because an alternative market choice would only generate $30 a year. Conversely, if the prevailing market rate is 7%, the bond will be priced lower because an alternative market choice would generate $70 a year, making the bond less appealing.
Floating-rate notes (FRNs), or “floaters”, are bonds with variable interest rates. FRN interest rates reference a benchmark rate (e.g. U.S. treasury bill rate, LIBOR) and coupon payments fluctuate as the benchmark rate changes. Unlike fixed-rate bonds which have an inverse relationship with interest rates, FRNs protect investors from increases in interest rates.