Recently Two Infrastructure Investment funds list on Indian markets. During that time, what I found is many people are unaware what is this and still investing for Listing gain. Though IRB infrastructure investment trust listed with good gain, the number was small in front of Equity gain, mant Media anchor, so called experts start calling it failure.
On the other hand Foreign investor and specifically FIIs are bullish on india. Not only in equity but on Debt.
Feb 2017 FII net debt purchase ~10600 cr..Jun 17 MTD ~5300 cr in just 4 working days..Case of FIIs more confident than DIIs on India rates?
— Lakshmi Iyer (@Lakshmi1876) June 7, 2017
Hmm. So what is debt or Fixed Income?
Fixed income is large Segment of asset class in which Debt is one part as Asset backed securities also come into fixed income. It is very large market then equity as Unlisted companies, governments, some different types of corporate entities and sometimes individual can also raise funds. In equity, you have claim on residual earnings. Here the lender, the entity which is giving money, is holding right even before the tax in many countries. The main difference in between Fixed income and Equity is that you are not owner of the business. You simply have right on the amount which is supposed to come to you. Most of the time its interest. But the investors in fixed income may gain through Accrued interest also. That is say you buy bond $ 500 sold it for $700, your holding period yield is 200/500 = 40% assuming you don’t received any coupon payment.
Simple Bond, most basic Fixed income security is like legal agreement in between Buyer and Seller. We call them Lender and Borrower respectively. Basic features of bond is Maturity, Issuer, par value, currency denomination, coupon rate and the frequency of coupon payment. Most of the time, legal and regulatory consideration also play key role like in US Bond from Freddie Mac, Fannie Mae And in India IIFCL, NAHI. Govt Bond are highly rated. So the coupon payment on them will be low. But Bond from Say, HDFC Listed on London Exchange will be different.
There are many different issuers, but all of them come under 6 categories.
Supranational Like World Bank, IMF or some other entity which is not under one govt. Very few but strong. Your money is in secure hands. Either they will issue new bond or will pay with some other funding. Sovereign Bond are bond issued by govt of country. Maybe ad hoc or for For specific purpose. Some of them are used to determined Risk free rate. No need to say that there is zero Default. Like bond issued by US Govt, Japanese Govt, India. Another category is non sovereign. All state govt and municipal corporation come under it. Most of the time they are backed by Central Bank of the country. Again. Low risk generally, but you need to check for what it will be used. Like sometimes if Municipal corporation is raising for water treatment plant, then its possible for them to increase taxation and repay bond. Quasi Sovereign bond is next category. The example is Freddie Mac, Fannie Mae, Ginnie Mae in US. NTPC, NHPC in India. They are not issued by govt but if needed, govt may take responsibility. Again credit ratting is important. Lower default risk then corporate but nearly zero default. I mean why Fannie Mae or NTPC will default?
Other issueer are either corporate entities or special purpose entities. Financial issuers and Non Financial Issuer are further classified into this categories. Here credit rating and market price is important.
Par Value, Face Value, Redemption Value, Maturity Value, Principal Value is the amount you will received at the end of time on maturity date, mentioned on bond indenture. Most of the time its round figure. Like $1000
Coupon rate is the amount you will received on scheduled dates. Most of the time it is in percentage mentioned on Indenture. So you may see $1000 FV, 6% Semiannual, 10 year bond maturing 2021. It mean that you will received $30 on pre decide date every six months and on maturity you will received $1030. There are some bonds without maturity or the date is so long that they will not mature in your lifetime. Like maturity date is 2175, 17 September. But still you will received coupon payment. You may call them perpetual bond. They are like Equity with Fixed cost.
Some bond don’t have fixed payment. They will pay some floating payment. Like CPI inflation +2%, LIBOR +3%, in such case, you are having knowledge what will be the payment next time before hand.
Some bonds will not pay you anything before maturity. You will received whole payment at maturity. They are called as Zero coupon bond and the return earned on them is accrued over time just like capital gain on equity.
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