Callable Bond – Part 3: Perpetual Subordinated Capital Note

Perpetual subordinated capital note does not have a maturity date. It has a pre-negotiated coupon (which can be fixed, floating or switches from fixed-to-float in its lifetime) to the holder periodically but the coupon can be switch off if no dividend is being distributed to the ordinary shares at the time. The deferred coupon might be cancelled (non-cumulative) or pay back all at the same time in arrear (cumulative). Continue reading “Callable Bond – Part 3: Perpetual Subordinated Capital Note”


Callable Bond – Part 2: Callable HY in Practice

In this article, I focus on bonds comes with callable features when issued and look into why the bonds are structured the way it is. The callable bonds tend to be from HY issuers. Bond options structured thru fixed income desk of investment bank would not be considered here as these are largely interest rate investment and hedging derivative products with government bond or highly liquid investment bonds as underlying instrument.   The consideration can be different when compared with the cash HY bonds (e.g. the payoff of bond derivatives follow mechanical rule whereas the strategic financing decision at the company level would determine whether a HY bond be called – not just bond price in comparison with the strike). Continue reading “Callable Bond – Part 2: Callable HY in Practice”

Callable Bond – Part 1: YTW vs OAS

Callable bond: a credit perspective – Part 1: YTW vs OAS

Bonds with callable feature are very common in the HY space with close to 65% and 35% of all new US and European HY bonds are callable. These bonds tend to have a call schedule (rather than a single call date and price) with credit component more of a concern than the fluctuations in interest rate. This is a topic falls in an area somewhere between quants and fundamental analysts and tends to ignore by many. I intend to look closer to it in this series of articles. Yield-to-worst (YTW) and option-adjusted spread (OAS) are the commonest analytics being used. In part one, I will explain how to calculate YTW and OAS and how should we interpret them. Continue reading “Callable Bond – Part 1: YTW vs OAS”

Demystify the Volatility Cone

Volatility cone is a visualisation tool for the display of historical volatility term structure. It was introduced by Burghardt and Lane[1] in early 1990 and is popular in the option trading community. Using the same methodology, we can extend the use of such chart for periodic return data. I find these charts useful not only for options but also for the general market. Continue reading “Demystify the Volatility Cone”

Benchmarking with Euro Bond ETF

Bond ETF is now an important investment vehicle for US based high yield investors with the top 5 HY Bond ETF accounting for a total market cap of exceeding $40bn at the time of writing (24/6/14). While it is still just a small fraction of the $1.5tn US high yield market, the leading ETF iShares iBoxx $HY Corp Bond ETF (HYG – $13.5bn market cap) and SPDR Barclays HY Bond ETF (JNK– $9.8bn market cap) are closely following by many investors as the passive investment style of the ETFs makes them ideal benchmark (either when comparing with other funds or other asset classes). Moving across the Atlantic, HY bond ETF also enjoys phenomenal growth. The market cap of the biggest iShares iBoxx Euro HY Corp Bond ETF (IHYG) has grown more than 10-fold since Dec 2010 and reaches a market cap of EUR3.2bn. Continue reading “Benchmarking with Euro Bond ETF”

Credit migration matrix – use and misuse

A rating is supposed to be a stable long term predictor of the creditworthiness of a borrower. Every once in a while, the Credit Rating Agencies (CRAs) would release their analysis upon rating migration and, more importantly, how their ratings compare with realised default frequencies. The information is often summarised in form of a credit migration/transition matrix.  It is a useful tool but sometimes be misused. Continue reading “Credit migration matrix – use and misuse”