Equity Blue

The recent article presented the concept of the yield to maturity as an universal indicator, which provides the real annual yield offered by a given bond. The universality of this indicator enables to compare various bonds between each other. The yield to maturity derives from the price, for which the given bond can be bought. If the price of the bond grows, its yield to maturity decreases and vice versa. Which factors influence the bond price, respectively its yield to maturity over time? First, it is the creditworthiness of the issuer , and second, it is the development of market interest rates . Market interest rates will be reviewed in the next article. Below we are going to look at the issuer’s creditworthiness. Creditworthiness of the Issuer The more is the issuer creditworthy the lower are his borrowing costs. Among the most reliable issuers are being considered states and their governments, and that is why their bonds are usually more expensive, respectively they offe...

In the recent article it is mentioned that issued bonds are being traded in a so-called secondary market. Bonds are traded for a price, which is being generally set by supply and demand. Factors that determine bond prices will be reviewed in detail in the next article. Now, let us focus on one of the very significant parameters, which are being closely observed by bond investors: the so-called yield to maturity (often abbreviated to YTM ). The yield to maturity is a number presented in percentage points, which says to the bond investor what is going to be the real annual profit (yield) when purchasing a given bond. The key parameter, or say a variable, for the calculation of the yield to maturity is the actual price of the bond, for which the investor can buy it. The investor knows that the particular bond generates a fixed annual coupon, and that in the maturity of the bond, he gets back the nominal value of the bond. Let us show the concept of the yield to maturity in an exem...

Bonds are traded in markets in percentage points of their nominal values. Whether in financial media, banks, or on stock exchanges, we can often see bond prices quoted as, for example, 101 %, 103.2 %, etc. Practically it means that one piece of a bond, which has, say, a nominal value of USD 1 000, can be really bought for USD 1 010 in case of a price of 101 %, or for USD 1 032 in case of a price of 103.2 %. Bond traders do speak their specific language. It can be heard, for example, something like: "I sell the nominal of a million dollars of bond XYZ for 101". It means he wants to sell, say, 1000 pieces of a bond with a nominal value of USD 1000 a piece for a price of 101 %, i.e. he expects to receive for the whole nominal a sum of USD 1 010 000. Primary versus Secondary Market A new bond issue is usually first offered by the issuer to big institutional investors within a so-called primary auction . By the primary auction the bond gets to the market. After the pri...

Bond is one of the basic investment instruments, in which an investor can put his free financial means. It is a security, by which the issuer of a bond borrows money. The bond issuer is therefore a debtor, and the investor, who buys the bond, is a creditor. A bond is therefore an alternative to a classical bank loan. Among major bond issuers are usually sovereign governments, corporations, and municipalities. For all these mentioned issuers bonds represent a significant source of financing their investments activities. Issuers offer their bonds directly to investors. Bond versus Equity Bond as such belongs next to equity (a share) to the most basic types of securities. However, the investment motives of a shareholder differ from the investment expectations of a bondholder. A bondholder: •   targets at the fixed income, which is being offered by the bond. •   does not have the right nor usually the interest to influence the management of the issuing company. ...

One of the basic structured leveraged instruments, which are exchange traded, is a so-called warrant . Warrant is a type of security, which is in fact a wrapped option. For the purpose of reviewing the warrant and its functioning, it should fully help us to look at the fundaments of options and with them associated terminology and functionalities. A warrant, i.e. an option, provides the right to purchase or to sell a given amount of a defined underlying asset for a given price in a given period of time. The underlying asset can be bought or sold either any time during the life of such warrant (option), in such case we talk about a so-called American style , or at the maturity of the warrant (option), in such case we talk about the so-called European style . A warrant (option) with the right to buy an underlying asset is being bought with the expectation of a future growth of the price of the underlying asset. This type of warrant (option) is called “ Call ”. A warrant with the...

After a series of articles on the topic of bonus certificates let us have a more detailed insight into the area of trading instruments that are using the leverage effect. Similarly as the bonus certificates these instruments and structured products can be traded on stock exchanges in Germany and thus they can be easily traded through majority of brokerage houses and companies. Leveraged instruments generally offer investors the opportunity to generate an above average yield thanks to the leverage effect. In real life it means that the movement of the price of an underlying asset by one percentage point means a change of the value of a leveraged instrument by a certain multiple. For example, a structured instrument with a leverage of 1:5 changes its value five times more than is the actual change of the value of the underlying asset itself. With these instruments investors can bet on growth of the value of an underlying asset or its decrease. The nature of these instruments...