Coupons premium

A first kind of these insurance products are called "catastrophe bonds" and consist in securitizing environmental risks in bonds, which could be sold to high-yield investors. The catastrophe bonds are able to transfer risk to investors that receive coupons that are normally a reference rate plus an appropriate risk premium. By these products, insurance companies limit risk exposure transferring natural catastrophe risk into the capital markets. In this way, with the involvement of the financial markets, their global size offers enormous potential for insurers to diversify risks. 

Placing printed premiums (coupons) within a food package is common but these materials also may be sources of taints. Premiums intended for packaged dry mix beverages were tested for their contribution of... 

Now let us imagine that the yield on a 100-year government bond with a coupon of 6.00% is 6.20%. This fits investor expectations that the very longdated bond should have a yield premium of approximately 20 basis points. This would set the price of the 100-year bond as ... 

Dhillon, U., Lasser, D., 1998. Term premium estimates from zero-coupon bonds new evidence on the expectations hypothesis. J. Fixed Income 8, 52-58. 

Let us now consider the following example. ABC pic has issued a 5-year convertible bond with a market price of 112.2 and an underlying share with a market price of 0.65. The bond has also a coupon of 5.5%, while the dividend yield of the underlying stock is 2%. If an investor buys just 1 00 and the bond may be converted into 1 51.7 shares, the premium over a direct purchase of the ordinary shares expressed in basis points is equal to (112.2 - 98.6) or 1 3.6 per bond, in which 98.6 is obtained by multiplying the conversion ratio of 151.7 by the current stock price of 0.65. The compensation for this premium is the cash flow differential between the convertible and underlying shares, which is calculated as ( 1 00 x 5.5%) -(98.6 x 2%) or 3.5. The payback period measure is 13.6/3.5 or 3.86 years and the concept is similar to payback period used in corporate finance analysis. 

During the book runner phase, banks go in the market with a range of coupons and conversion premium in which each value in the range has a different implied volatility, representing the market sentiment. Thus, the market supply... 

Maturity Coupon Yld to Mty Maturity Conversion Premium at Implied Premium... 

Another way to calculate the yield return is the discounted margin. It differs from the simple margin because the first one amortizes the bond s premium or discount at a constantly compounded rate. The main disadvantage of this method is that it requires estimation of the reference rate over the bond s life. Assuming a bond paying semi-annual coupons, the discounted margin is given by (10.5) ... 

To illustrate what happens to a bond selling at a premium, consider once again the 4-year, 6% coupon bond. When the discount rate is 5%, the bond s price is 103.546. Suppose that one year later, the discount rate is still 5%. There are only three cash flows remaining since the bond is now a 3-year security. We compute the present value of the coupon payments in the same way as before ... 

Term to Maturity in Years Premium Bond 8% Coupon Discount Bond 6% Coupon Par Bond 7% Coupon... 

Note that spread for life considers only the accretion/amortization of the discount/premium over the floater s remaining term to maturity but does not consider the level of the coupon rate or the time value of money. 

The structure is achieved by XYZ effectively buying 5-year caps struck at 4.50% on five times the notional principal of the note issued. Eor example, if XYZ issued notes with a face value of 10 million, it would effectively buy interest rate caps from investors with a notional principal of 50 million. The up-front premium of 19 bp in this example, therefore, becomes geared up to 95 bp, equivalent to 20 bp p.a. This enables the investor to receive their enhanced coupon, but the geared payment from the caps sold means that investors return diminishes rapidly in any period where EURIBOR sets above 4.50%. 

As we mentioned earlier, it is difficult for credit portfolio managers (where the market is overwhelmingly noncallable) to actively manage convexity of their holdings. However, preferring higher coupon instruments and premium bonds over lower coupon and discount bonds tends to increase the convexity of the portfolio and in turn increases its total return. 

Principal strips trade at a premium to coupon strips. Investors find principal strips more attractive because of their greater liquidity and, in some markets, for regulatory and tax reasons. This holds true even, at times, when their outstanding nominal amounts are lower than those of coupon strips. 

Today, many bonds issued by corporations are callable. This means that the corporation may force the early retirement of the bonds. The usual procedure is to defer the first call date for a period after the initial issue of the bond (e.g., five years). After this period, the bonds may be called by the corporation. If the bond is called, the investor will receive the bond s maturity value plus a call premium, usually a maximum of one year s interest. However, the bondholder then forgoes the right to any other coupons on the bond. 

If a bond s price is greater than par (yield less than the coupon rate), the bond is selling at a premium. If a bond s price is less than par (yield greater than the coupon rate), the bond is selling at a discount. The calculation of a bond s current price was discussed previously. Once the current price is known, the premium or discount on the bond is simply the difference between this price and the par or maturity value of the bond. However, there is another method that uses the difference between the coupon rate and the quoted yield to determine the amount of premium or discount for the bond. 

The payoff on the index tranche product is driven by the amount of realized portfolio loss that has eroded the tranche width. The tranche exposure is defined by the attachment point and detachment point. The attachment point is a lower percentage than the detachment point, and the difference is referred to as the tranche width. For reference portfolio losses that are below the attachment point there is no realized loss to the tranche notional. If losses exceed the detachment point, then the tranche notional is completely eroded. When portfolio losses lie between the attachment and detachment point there is a fractional loss to the index tranche. The buyer of protection (short credit risk) pays a premium or coupon leg that is based on the notional outstanding of the tranche. The seller of protection (long credit risk) makes contingent payments dependent on the amount of loss that has written down the tranche. 

Using this expected price at period 1 and a discount rate of 5 percent (the six-month rate at point 0), the bond s present value at period 0 is 97.4399/(1 -F 0.05/2), or 95-06332. As shown previously, however, the market price is 95.0423. This demonstrates a very important principle in financial economics markets do not price derivative instruments based on their expected future value. At period 0, the one-year zero-coupon bond is a riskier investment than the shorter-dated six-month zero-coupon bond. The reason it is risky is the uncertainty about the bond s value in the last six months of its life, which will be either 97-32 or 97.55, depending on the direction of six-month rates between periods 0 and 1. Investors prefer certainty. That is why the period 0 present value associated with the single estimated period 1 price of 97-4399 is higher than the one-year bond s actual price at point 0. The difference between the two figures is the risk premium that the market places on the bond. 

We conclude this chapter with an illustration of the OAS technique. Consider a five-year semiannual corporate bond with a coupon of 8 percent. The bond incorporates a call feature that allows the issuer to call it after two years and is currently priced at 104.25. This is equivalent to a yield-to-maturity of 6.979 percent. We wish to measure the value of the call feature to the issuer, and we can do this using the OAS technique. Assume that a five-year Treasury security also exists with a coupon of 8 percent and is priced at 109.11, a yield of 5.797 percent. The higher yield reflects the market-required premium due to the corporate bond s default risk and call feature. 

Principal strips trade at a premium to coupon strips. Investors... 

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