InfoSeries 02: Eurobonds — A Deeper Dive
In the last edition of our InfoSeries, we introduced you to Eurobonds. With this edition, we are diving deeper into some Eurobond parameters. Let’s get to it!
Naming Conventions — When you look up stock tickers, you see symbols like TSLA (Tesla), NFLX (Netflix), AAPL (Apple), etc. Eurobonds also have tickers and they’re not as smooth to decipher as tickers for stocks, but we can walk you through and make it smooth like bread and butter! The picture below is what Eurobond tickers look like.
- The first group of letters represents the issuing entity and they’re unique to each issuing entity.
- Next to that is a figure which can be an integer (no decimal) or a float (with decimal), or sometimes, a mixed fraction (a number and a proper fraction). This number represents the coupon rate (more on this later).
- Lastly is a group of numbers that signifies the maturity date of that bond. Usually, this date uses the American convention (month/day/year).
Sometimes, the order of these three parameters is arranged as coupon/entity symbol/maturity date. Regardless of how they’re arranged, you should now be able to identify the details of a bond by looking at the ticker!
Definition of Terms
Coupon Rate — The coupon rate is the rate (of interest) that the entity pays on the bond annually. In most cases, these coupons are paid semi-annually on the anniversary date of the bond and six months after. In some cases, the frequency of a coupon is either quarterly or annually.
Maturity Date — The maturity date is the date which the bond is billed to mature. In some instances, a bond may be recalled or refinanced before its maturity date.
Yield — The yield of a bond (not to be confused with the coupon rate) is the total return an investor will earn from a bond on an annual basis. This total return will typically include the coupons to be paid from the date of purchase and the discount/premium to par paid at the time of purchase. If a bond is trading below the par value, the yield will be higher than the coupon rate. Conversely, if a bond is trading above its par value, the yield will be lower than the coupon rate.
Let’s switch things up…
There are some special types of bonds: floating-rate bonds, amortised bonds, zero-coupon bonds, and perpetual bonds. These bonds are not your regular type of bonds in which coupons are paid periodically and the principal amount is repaid in full at maturity.
Floating Rate Bonds — These types of bonds do not have a fixed coupon rate. The coupon rate is usually benchmarked against a money market rate e.g., London Interbank Offered Rate (LIBOR), which is the rate major global banks lend to one another. Such bonds may be issued at six-months LIBOR + X, with X being a premium (in percentage) above the LIBOR rate. The coupon on a bond like this will adjust on pre-announced milestone days along with the prevailing LIBOR rate.
Amortised Bonds — An amortised bond will pay its principal (face value) in pre-agreed instalments over the lifetime of the bond, with the timing often coinciding with the dates at which the coupon payment is made.
Zero Coupon Bonds — as the name implies, zero coupon bonds do not pay coupons over the lifetime of the bond. Perhaps, you are wondering how an investor will make returns? Zero coupon bonds are sold at a very deep discount to their par value. The difference between this par value and the issue price is what the investor earns over the lifetime of the bond.
Perpetual Bonds — Perpetual bonds are bonds which exist and pay coupons into perpetuity i.e., forever. Although in some instances, these bonds have callable dates, any investor who buys into a perpetual bond should be prepared for a long ride.
Do you know?
Do you know that the oldest perpetual bond in existence was issued in May 1648? The perpetual bond was issued by the Dutch Water Board of Lekdijk Bovendams. The bond is currently held by Yale University, and it was issued to fund repairs to flood defenses on the Lek River, south of Utrecht, Netherlands.