Bonds - Fixed Income Securities

To start a company, I need money . .If I require in total $200 million dollars, I put in $50 million my own money, known as Equity and borrow the rest $150 million, that becomes part of Fixed Income! Lets understand various type of Fixed income securities and how they function?

On a similar lines, If I am a Portfolio Manager of a Fund , I wish to invest money of my investors in Fixed income securities I can go to my Friend who is Dealer in Fixed income securities. Before investing , I need to be sure which type of Bond I want to buy ,issuer of it , maturity, liquidity, credit risk, interest rate risk and returns I want to invest money based on that Dealer can suggest me the right bond . .

Fixed income can be issued by corporates, Municipality, State, Sovereign and various entities for various maturities. Bonds are generally issued for long terms maturity (10 to 20 years) , Notes (5 -10 years), Treasury Bills issued by Govts are upto 1 year.

Zero coupon Bond: Where you wont receive interest regularly. Lend money now at discounted value and get the money back on Maturity. Diff between money you lend vs you receive on maturity is Interest

Fixed Rate bonds: Lend/Buy now at Issue/Market price and receive Fixed coupons regularly as agreed and get the Principal money back on Maturity.

Floating Rate bonds : Lend/Buy now at Issue/Market price and receive Floating coupons regularly as agreed and get the Principal money back on Maturity

Inflation Bonds : Lend/Buy now at Issue/Market price and receive int based on Principal value adjusted for inflation and get the Principal money back on Maturity

Callable and Puttable Bonds : Callable Bond gives issuer right to payback me the Principal money when market int rates are low & Putable Bonds give me right to receive my Principal money back when market int rates as high . Ideally, Putable Bond has a lesser interest than Callable Bond

Asset back Securities and Mortgage back securities :

So basically a retail bank gave house loan of $100 million dollars to individuals . Investment bank bought this loan portfolio and issued securities known as MBS underlying house property backed as collateral in the market which investor like me buys the same. When the underlying were other loans except for House like business, credit card, commercial , these were known as ABS.

Due to various needs of Investors, Investment bank made CDOs where ABS/MBS were re engineered into various tranches or subsets like Senior ,Junior, Subordinate, mezzanine, equity which differed based on Credit risk and returns to meet the needs of various investors. The ratings of these securities justified they were safe from credit risk . Int and Principal gets paid monthly depends on structure of ABS/MBS .

Bond markets are huge compared to equity markets. All these Bonds gets traded in secondary market where you can buy and Sell at the market price too.

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