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1、2NONPLAINVANILLABONDSInChapter1welookat“plainvanilla”bonds—bondswithfixedcoupons;theirprincipalispaidonlyatmaturity,andsoon.Wehaven’tanalyzedthemyet;wejustpresentedthemthere.Theanalysiscomesinlaterchapters.Let’sgettoknowsomemoreinterestingbondstructuresfirs
2、t.Thesearenotprevalentamonggovernmentsecurities,butthey’requitecommonamongcorporateandothernongovernmentissuers.AmortizingBondsIfabondisscheduledtopayallofitsprincipalatmaturity,itisknownasabulletbond.1Manybondshaveascheduleofpartialprincipalpay-mentstobe
3、madepriortotheirfinalmaturity.2TakealookatthebondinTable2.1.Thebondpayscouponsannually.Ifitwereabulletbond,eachofthefirstninerowswouldbethesame:couponof$5,zeroprincipalpaid,andremainingprincipalof$100attheendofeachyear.Inyear10,besidesthe$5coupon,$100ofprin
4、cipalwouldbepaid.Instead,thisamortizerfollowsthatpatternonlyforthefirstsixyearsofitslife,afterwhichthescheduledamortizationkicksin.Attheendofyear7,$20ofitsprincipalispaidtogetherwiththecoupon.3Thisleaves$80inprincipaloutstandingthroughoutyear8,forwhich5%mu
5、stbepaidtothelender,or$4.Another$20inprincipalispaidattheendofyear8,furtherreducingthefollowingyear’scoupon.Inthefinalyear,$401718•FundamentalPrinciplesofBondStructure,Pricing,andInvestingTABLE2.15%Coupon,10-yearBondAmortizationSchedule:20%ofPrincipal,Begi
6、nninginYear7YearCoupon($)Principal($)TotalCashFlow($)RemainingPrincipal($)15051002505100350510045051005505100650510075202580842024609320234010240420inprincipalmustbepaid,sincetherearenomoreyearsavailableforamortization.Whydocompaniescreatesuchbonds?Onerea
7、sonisthattheassetthey’repurchasingwiththefundsraisedbythebondsalemaybeexpectedtoproducearevenuestreamsimilartotheamortizingscheduleofthebond.Asecondisthattheinterestratepaidontheamortizercouldwellbelowerthanthatofthebulletbond.Sinceagrowingfractionofthepr
8、incipalisrepaidearlier,theinvestorisexposedtolessdefaultriskholdingtheamortizer.Thatis,shouldthecompanydefaultanytimeafteryear7,thepotentiallossislowerthanabulletbondbecausetheamountsubjecttodefaulthasdecreased.Less
