MoneySense Live - Where to Invest - Fixed Income Market

Transcript

2. • Financial Adviser for Sun Life of Canada • Established himself as The Binondo Economist • Registered Financial Planner and Certified Investment Consultant • Host of CHInoy TV
3. Fixed income market By: Kendrick Chua
4. Outline of discussion • Definition of fixed income • Pros and cons of investing in fixed income • Different fixed income available in the market • Computing for prices and yield • Exercises
5. What are fixed income? An investment that provides fixed periodic payments and the eventual return of principal
6. • Government • Private Issuer • Par value, maturity value Principal amount • Yield • Paid quarterly or semi-annually Coupon • Less than one year • More than one year Maturity Components of a fixed income
7. Advantages of investing in fixed income • Provide a steady stream of income Regular income • Low volatility helps reduce overall volatility of portfolio Diversification • Principal is paid back upon maturity Capital preservation • Can be readily sold in the secondary market Liquid
8. Disadvantages of investing in fixed income • Future fixed income may provide higher interest rate than the current one Interest rate risk • Interest may not be higher than inflation resulting to negative real return Inflation risk • Issuer may not be able to continue interest payments or principal Default risk
9. How do you earn from a fixed income? Interest income from periodic payments Capital appreciation How do you earn from fixed income?
10. Fixed Income Long term Negotiable Certificate of Deposit (LTNCD) Preferred Shares Bonds Special Deposit Accounts (SDA)
11. Long term negotiable certificate of deposit A long term negotiable certificate of time deposit indicating an amount of a bank’s indebtedness with a designated maturity
13. Preferred shares Company shares that have higher claim than common stocks and typically pay a fixed dividend.
14. Special deposit accounts Short-term liability offered by the BSP with tenors ranging from several days to two months
15. Bonds A debt instrument that promises to pay a specified sum of money on a specified date
16. Bonds according to issuer: Private •Corporate bonds Government •Government securities
17. Foreign currency-denominated bonds US Dollar •Republic of the Philippines (ROPs) Japanese Yen •Samurai bonds
18. What are government securities? Evidence of indebtedness issued by the National Government and are free from default • Maturity <1 year • 91-day 182-day 364-day Treasury bill • Maturity <1 year 2-year 5-year 7-year 10-year 20-year Treasury bonds
19. What are corporate bonds? Debt security issued by public or private corporations Higher interest compared to government securities Usually to finance expansion or to retire existing bonds
20. Bond yield Yield is a figure that shows the return you get on a bond. Coupon amount Price
21. Example 1: How much will a bond with a par value of P1,000 and coupon rate of 8% pay an investor? P80.00 (P1,000 par value x 8%)
22. A debt instrument that does not pay interest but is traded at a discount, with the face value repaid at the time of maturity Zero coupon bond
23. Bond prices move inversely to interest rates • Price < Par or interest rates rise Discount • Price > Par or interest rates fall Premium Bond valuation
24. Example 2: What is the yield if the bond price goes down to P980? 8.16% (P80/P980) Example 3: What is the yield if the bond price goes up to P1,020? 7.84% (P80/P1,020)
25. Yield to maturity An attempt to measure the compounded rate of return on a bond investment if it were held to maturity.
26. Example 2: If a P1,000 bond with a 10.0% coupon rate was selling for 92 and matures in 10 years, what is the yield to maturity? Coupon = P100 (10% X P1,000) Annualized gain = P11.25 ([P1,000 maturity value – P920 current value]/ 10 years Estimated average value of investment = P960 ([P1,000+920/2]) P108 = 11.25% P960
27. What is a yield curve? Gives an idea of the future interest rate change and economic activity Shows the correlation between interest rate and the time of maturity
28. Yields rise as the maturity lengthens
29. Long term yields fall below short term yields
30. Short and long term yields are equal
31. Exercise 1: How much will a bond holder receive every quarter if he invests P1M in XYZ bond that has a coupon rate of 8%.