The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

KEY POINTS

• Bonds have a par value and a coupon rate that can have a fixed or floating interest rate. Bonds can have a bullet maturity or can be amortizing instruments. A bond can be callable by the issuer prior to the maturity date or maybe putable by the bond holder.

• The U.S. Department of Treasury issues both discount and coupon securities. Coupon securities can be either fixed rate or variable rate securities (i.e., inflation-protected securities). U.S. Treasury securities are backed by the full faith and credit of the U.S. government and therefore are viewed as default-free securities.

• Stripped Treasury securities are zero-coupon notes or bonds created by brokerage firms through a process known as coupon stripping under the Treasury’s STRIPS program.

• Federal agency securities include securities issued by federally related institutions and government sponsored enterprises. The former are arms of the federal government and generally do not issue securities directly into the marketplace and, with important exceptions, are backed by the full faith and credit of the U.S. government. Government sponsored enterprises are privately owned, publicly chartered entities whose securities are not backed by the full faith and credit of the U.S. government.

• There is a wide range of corporate bonds that can be issued by a corporation that give some creditors priority over other creditors in the case of the bankruptcy of the issuer.

• A convertible bond is a corporate bond where ...