07 August 2015

Bond Trading: Security Structures, Clauses and Options

​​​​​​​​​​​​​​​Level of security in the assets of the Corporate Issuer The level is predefined and may have a high impact on your investment, bein...

​​​​​​​​​​​​​​​Level of security in the assets of the Corporate Issuer

The level is predefined and may have a high impact on your investment, being a debtor, if the Issuer faces financial distress.

Security Structure (Collateral)

In the table below you can see a typical struct​ure of the various means of financing a Corporation can exploit. 

It is worth noting that for some Bond types (especially related to Subordinated Loan Capital in Fina​ncial Institutions) the Issuer has the option to weaken the position of the Investor before financial distress occures, thus even before the Issuer defaults (such as CoCo Bonds). 

Furthermore it should be noted that in recent years, Investors buying Subordinated Loans have, in several cases, lost all of their investment when the Issuers have gone into default or restructuring.

Bond-Structure-Level.JPG


Clauses and Options ​

Bond Issues can also include various clauses and options which may impact your position as an Investor. These include, but are not limited to: 

  • Option to prepay the loan at an earlier date than the maturity date (Callable) 
  • Deviation in Coupon 
  • Conversion or writedown of the Principal amount in case of certain predefined events or conditions occur 

A full overview of clauses and options is to be found in the prospect of each Bond issue.

​Redemption

An Issuer may have the right to redeem the Bond early (termed "call") at predifined dates and prices. 

Some Bonds may not have a maturity date (termed "perpetuals"; "PERP" or "Hybrid") which implies that the Bond will never expire/mature if the Issuer doesn't exercise his right to "call" the Bond. 

If a Bond passes a call date this can also affect the coupon, e.g. a fixed rate Bond may be changed to a floating rate Bond based on certain criteria, e.g. regulatory or rating events. 

A full overview of redemption options is to be found in the prospect of each Bond issue.​

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.