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EduPristine>Blog>#FRM Tutorial: Double Barreled Bonds

#FRM Tutorial: Double Barreled Bonds

March 2, 2010

#FRM Double Barreled Bonds

Bond.

#FRM Double Barreled Bond

What is a bond?

A bond is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities. Bonds pay the bearer a fixed amount a specified end date. A discount bond pays the bearer only at the ending date, while a coupon bond pays the bearer a fixed amount over a specified interval as well as paying a fixed amount at the end date.

What are Double-barreled bonds?

A revenue bond that is issued by a municipal or state authority and is guaranteed by the overlying municipal or state authority is a double barreled bond. For example, if a transport authority for a state issues a bond, in the event that revenues from the transport authority are not enough to pay back the bond, the state government would use its tax revenues to make up for the interest and principal payments. So, for these bonds the cash flows are pledged by two distinct entities. The First entity is under obligation to make interest payments, whereas the other owes the principal payments. These are municipal general obligation (GO) bonds as in contrast to revenue bonds because they are backed by the issuer and its taxing authority.

A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a concerned revenue-generating entity associated with the purpose of the bonds. Unlike Double Barreled (general obligation) bonds, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds; other revenues like tax revenues and the general credit of the issuing agency are not so encumbered. Since the security of return is not as high as that of double barreled bonds, revenue bonds generally offer a slightly higher interest rate than G.O. bonds. However, they are usually considered the second-most secure type of municipal bonds.

Any government agency or fund that is run like a business and generates operating revenues and expenses can issue revenue bonds:

  • Airports, seaports, and other transportation hubs
  • Power plants
  • Water Supply utilities
  • Toll roads and bridges
  • Prisons

Other Types of bonds:

  • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
  • Zero-coupon bonds pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity.
  • Registered bond is a bond whose ownership and subsequent purchaser is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner.
  • Serial bond is a bond that matures in installments over a period of time.
  • Book-entry bond is a bond that does not have a paper certificate.
  • Lottery bond is a bond where Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond.
  • War bond is a bond issued by a country to fund a war.
  • Inflation linked bonds, in which the principal amount and the interest payments are indexed to inflation.
  • Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets.
  • Perpetual bonds are also often called perpetuities or ‘Perps’. They have no maturity date.

 

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#FRM Concept Checkers #FRM Double-Barreled Bonds #FRM Exam Tips #FRM Prep #FRM Study #FRM Syllabus Fixed rate bonds FRM FRM Exam frm tips lottery bond maturity perpetual bonds PRM Registered bond revenue bonds Serial bond war bond

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