Yanuar Dananjaya, Bsc.

, MM

Bond Market
For long term funding and investment
Mostly > 10 years
Less liquid than money market

Bond Market

rate higher than commercial paper

Why company choose to issue bond than commercial
paper? Lock rate for long term avoid interest rate
risk (one of the four financial risk)
Main issuer: companies and government
Mostly coupon bond, some discount bond
In Europe there are some perpetual bond
Relation between CB IR and bond price is opposite

Yanuar Dananjaya, Bsc., MM

Corporate bond
Less save than government bond higher interest
2 Sources of company funding:
Equity

Bond Market

Debt bank credit or bond

From company point of view, debt funding is
riskier compared to equity funding because it must
be paid. But carries tax advantage and opportunity
to keep profit
Bond holder has claim to company asset in case of
bankruptcy very rarely exercised, instead most use
settlement

Yanuar Dananjaya, Bsc., MM

Corporate bond
Usually carry various restrictive covenants to protect
bond holder. Examples:
Limit dividend

Bond Market

Limit additional debt

Limit major decision merger, acquisition, new
business line, etc
Purchase certain amount of bonds every year
Reduce default risk reduce interest rate

Yanuar Dananjaya, Bsc., MM

Corporate bond (cont)

Some corporate bonds include call provision
(become callable bond) company has right to
redeem bond anytime they want.
Company wants to take advantage if CB IR fall

Bond Market

Company wants to avoid bond covenant

Company wants to change its capital structure
Company has un-used fund
Call provision lower the price of bond (increase
interest rate)

Yanuar Dananjaya, Bsc., MM

Corporate bond (cont)

Some corporate bonds include conversion (become
convertible bond) bondholder has right to convert
bond to certain amount of stock
Bondholder likes it because possible profit if stock
price increase much

Bond Market

Increase price of bond (reduce interest rate)

Secured bond bond with collateral. Collateral will
be liquidated to pay bondholder in event of bankruptcy.
Lower bond risk
Subordinate bond bondholder will be paid only
after holder of higher rank bond get paid higher risk
Junk bond bond issued by small companies
high risk premium.

Yanuar Dananjaya, Bsc., MM

Change of bond price

Bond price moves up and down due to change in
interest rate I = Rf + Rp any change in Rf or Rp
will change bond price
Change in Risk Free Rate is due to CB decision

Bond Market

Before CB change IR, investor try to predict the

change and act accordingly change bond price
Inflation high predict IR increase
Economic growth low predict IR decrease
Currency weak predict IR increase

Yanuar Dananjaya, Bsc., MM

Change of bond price

Change in Risk Premium
General economic condition. When economic
growth is high, risk premium decrease
Specific specific factors for a company

Bond Market

Increase of debt increase risk

Increase equity decrease risk
Increase cash level
Company new investment
Change of commodity price
Change of government regulation
etc