Knowledge Center
BONDS
A longer-term
debt obligation of the Government issued to fund or finance longer term
infrastructural projects such as roads, hospitals, etc.
The Government or organization that sells the bond is called the issuer. A bond is a loan for
which you are the lender or investor and Government or the organization, the
borrower or issuer. MATURITY DATE
This is the date that a borrower can expect his/her
money to be repaid in full. This is also the date upon which interest payments will be stopped. This date means that the bond terminates and hence will not exist anymore. TREASURY BILL TERMINOLOGY
TREASURY
BILL
A Treasury bill (TB) is a short-term money
market instrument that is issued by government. TBs represent a claim on
government while constituting a security of safety and simplicity, payable on a
certain date in the future. They are fully secured and guaranteed by
governments, and usually have maturities of 91, 182 and 365 days. DISCOUNT RATE (MONEY MARKET)
The interest rate at which a discount security is issued and traded. This is always lower than the yield. INTEREST
Borrowers pay lenders a charge for the right of
borrowing money.
The lenders earn money from interest.
This charge is stated as an annual percentage
income. COUPON
The borrower must compensate the investor/lender for the use of the money. This is reflected in the form of interest payments.
The coupon rate or coupon percent rate refers to the interest rate stated on a bond when it is issued. The coupon is typically paid semi-annually but could also be paid on an annual basis.
An example would be:
A N$1million bond with a coupon of 8.5% will pay N$85,000 per annum or N$42,500 semi-annually. DISCOUNT SECURITY
A financial instrument bought (or sold) at less than its nominal value. On the
maturity date the holder of such a security will receive the full nominal
value, which includes the interest earned by the investor. EFFECTIVE ANNUAL RETURN
The annualised return or yield earned by
investing in a security after taking into account the interest that is (or can
be) earned on the interest accumulated during a previous period. DISCOUNT RATE
The interest rate at which a discount
security is issued and traded. This is always lower than the yield. DISCOUNT SECURITY
A financial instrument bought (or sold) at
less than its nominal value. On the maturity date the holder of such a security
will receive the full nominal value, which includes the interest earned by the
investor. EFFECTIVE ANNUAL RETURN
The annualised return or yield earned by
investing in a security after taking into account the interest that is (or can
be) earned on the interest accumulated during a previous period. YIELD
The income return on an investment.This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost,its current market value or its face value. CLEAN PRICE
The purchase price of the bond excluding
any accrued interest. The clean price can be also viewed as the true cost of
the investment. ACCRUED INTEREST
Issuers pay coupons either on a semi annual
or annual basis to the holder on record or to the registered bondholder. Thus
if a bond is traded between coupon dates the seller would receive no interest
compensation for the period of holding or owning the bond from the issuer (as
he would no longer be the registered bondholder.) The buyer of the bond
therefore compensates the seller with the interest he should have received from
the issuer. This is referred to as accrued interest. CUM INTEREST
The amount of interest owed by the buyer to
the seller of the bond. EX INTEREST
The amount of interest owed by the seller to
the buyer of the bond. DIRTY PRICE OR ALL IN PRICE
The total market price of the bond. This is obtained by present valuing all future cash flows of the bond using the YTM as the present valuing rate. In simple terms the:
Dirty Price = Clean price accrued (cum) interest, or
Dirty Price = Clean price accrued (ex) interest. PREMIUM
The difference between the higher price paid for a
fixed income security and the security's face amount at issue.
If a fixed income security (bond) is purchased at a premium, existing interest rates are lower than the coupon rate. Investors pay
a premium for an investment that will return an amount greater than existing
interest rates. DISCOUNT
The condition of the price of a bond that is lower than par. The discount equals the difference "between" the price paid for a security and the security's par value
For example, if a bond with a par value of N$1,000 is currently selling for N$990 dollars, it is selling at a discount. |
