1、HDN AwardFinancial ServiceHOY6 36 Financial Services Graded Unit 3Candidate name: Wang YiqianSCN: 177153435Tutor: Zhang JuDue date: 31 October 2017Contents1.0 Brief introduction the corporate bonds .22.0 Corporate bond analysis.33.0 Corporate bond fund analysis.64.0 Introduction of Retail bonds and
2、Mini bonds .84.1 Retail bonds .84.2 Mini bonds.85.0 Related elements and attentions of purchasing corporate bonds .91.0 Brief introduction the corporate bondsA corporate bonds is a debt security，it can be issued by the public companies and private companies. The coupon is paid usually twice yearly,
3、it should be clearly stated in the purchase contract and the main reference index of the coupon rate is the prevailing market interest rate, the ratio of corporate bonds in the same period same and same industry, the credit rating of the issuing company, and the financing purpose. It is worth noting
4、 that if the prevailing market interest rate continues to fall, the bondholders coupon income will exceed expectations.The value of the bonds determined by the payment ability of the corporate and the profitability determines the ability of payment. And, if the issue amount of corporate bonds exceed
5、s its credit rating, the company needs provide fixed assets an security.In order to prevent monopolies and oligopolistic corporate bonds from the bond market, further ensures the consistency of the financial environment; the government encourages the issuance of innovative corporate bonds which are
6、retail bond and mini bond. The main characteristics of the two types of innovative corporate bonds are the higher risk and the principal is not repaid after the failure of the operation of the companies, but the returns are high, and it is similar to the characteristics of the stock and the investor
7、 mainly are small investors.There are two ways for financing including issuing corporate bonds or issuing stocks. Public companies are more likely to issue shares due to the cash flow arising from the payment of the coupon and the repayment of principal at maturity. But compared with the stock, the
8、risk of issuing corporate bonds is lower, because the repayment of principal when the maturity of corporate bonds and the purchase of stock equity investment cant be guaranteed, so the corporate bonds income is relatively stable or high. Besides, the bondholders have priority when the company bankru
9、ptcy liquidation.If the purchase is done at a price below the par value, the final transaction price is higher than the price at the time of purchase, that is, the spread income, so this is the reason why the steady investment products are welcomed by investors.The companys final decision to issue s
10、hares or bonds depends on the companys capital structure, which consists of equity, debt and hybrid securities.The major factors that determine the composition of the capital structure include the profitability of the last one to three years, the conditions of financial market, and the purpose of fi
11、nancing.And the purpose of financing mainly is expanding the current operations scale, Mergers and Acquisitions, project finance and adjusts the existing capital structure. Among them, the expansion of the current scale of operation mainly refers to the expansion of plant, new equipment, and recruit
12、ment of new employees. The acquisition of fixed assets, floating assets can produce the expected profits of the bondholders, and it may possible to provide dividends for the long-term holding of the corporate bonds.The Mergers and Acquisitions will have an impact on earnings expectations, because th
13、e new member companies to join there is a huge uncertainty. It is uncertainly the companys original culture and staff management can integrate with the new company in a short period of time.The capital structure refers to if there is too much stock, it will lead to cash flow slow down, ceased or eve
14、n broken. If the company has too many debtors, it will lead to the risk of bad debt.An important measure of whether capital structure is reasonable or not is leverage ratio, it is debt divided by equity. If the result is less than or equal to 3, this shows the capital structure is security. So the p
15、roportion of debt and equity determines the realization of a more efficient capital structure.But, Pecking Order Theory believes that the main purpose of finance, that is the reasons for issuing stocks or bonds are often inconsistent with their actual purposes. The asymmetric information leads to lo
16、wer dividends than expected.2.0 Corporate bond analysis iouThe main investors of corporate bonds are the individual investors and institution. When buying corporate bonds, issuers need to provide legal documents, called bond indenture, which specify the responsibilities and obligations of both parti
17、es. The companies need pool financing, which is from the capital of the corporate bond, so as to establish the Sinking Fund, used for one-off end-of-term repayment the maturity corporate bonds. And the certificate of debt guarantees the right of bondholders to obtain coupon regularly, and defines th
18、e obligation of the issuing company to repay the principal at maturity. But the company will appear the situation of suspending payment coupon, including the statement of cash flow shows that the companys cash flow is slows down and even stagnates, too much stock leads to the default on coupon repay
19、ment, and too many debtors debt cant cover the principal repayment and the economic events such as the financial crisis leads to the companys operating environment cant enhance profitability and cant get the principle back.The characteristics of corporate bonds is the use of funds is flexible，compar
20、ed with government bonds, corporate bonds have a higher risk. But the coupon is higher than the government bonds, because of the regular coupon payment and dividends. The coupon income belongs to dividend income so it needs to pay the dividend income tax, in order to encourage holders to hold the co
21、rporate bonds for a long period and avoid taxes, often through the regular dividends for the bondholders with three years and above to reduce their economic losses.If the principal repaid at maturity is higher than the total amount of investment, which is the dividends and due to higher than the pur
22、chase price to trade, it can get the spread. That is mainly reflected on the zero-coupon bond. When the original issue of corporate bonds, the central Banks Base Rate and the government bonds coupon rate which lead to the excessive setting of coupon, the company may recall and issue existing corpora
23、te bonds to reduce the pressure on the coupon cash flow.Also, there are another two types of corporate bonds, unsecured loan stock and debentures which consist of the fixed charge and the floating charge. The fixed charge is the value of a mortgaged asset needs to exceed its total value, after defau
24、lt, the holder has the right to process assets, dispose and use proceeds to repay debts, return the surplus to the company. The floating charge means that after the company defaults, the holder can take over the companys operation right.Unsecured offering or non-choice security is called naked deben
25、tures. Its earning are high, and generally a high credit rating companies issue this type of bond.Besides, there are two special types of corporate bonds which are Asset-backed bond and Catastrophe bond. Asset-backed is based on special assets to get the profit to pay bond holders coupon and dividen
26、ds through effective operation. When the operation of specific asset is lower than expected, investors need to take the risk with the issuing company.Catastrophe bond refer to transfer of operational risk from the company to the capital market, the bond issuer to purchase the specific insurance. And
27、, coupon and dividends are from the compensation paid by the insurance companies. As a result, the dividends and coupon for this corporate bonds rank first in all companies. If the specific natural disaster doesnt occur, the investor only receives the principal.So far the corporate bond is different
28、 from a fixed-rate saving account. The income of corporate bonds is investment income, the Financial Services Compensation Scheme does not provide protection, when the issuing companies default, the investors cant require FCA repayment, but the fixed-rate saving account can get compensation of 85,00
29、0. The coupon of the corporate bond is inversely proportional to its credit rating. The smaller companies with lower credit ratings often attract investors by higher coupon payment. However, the coupon formulate of fixed-rate saving account is influenced by the central Banks Basic Rate, the prevaili
30、ng market interest rates, and it is not influenced by the qualification of the company.The interest rate of fixed interest-rate saving account is formulated according to the basic interest rate of the central bank; it is not related to the qualification of the issuing company.Besides, the corporate
31、bonds are more flexible in terms of transaction prices, because it can be traded many times in the secondary market before the maturity of the bond, so it is called a tradable corporate bond. While the price of fixed-rate saving account is more stable, that is, the change of market conditions and th
32、e imbalance of supply and demand will not cause price fluctuation. Fixed-rate saving account can only be traded at maturity, but the corporate bonds can be traded at any time.The credit rating is an essential condition for company to issue bonds, which are triple A and D rating. The company with tri
33、ple A also called “prime grade debt” and the D rating means the company is the “junk debt”. The investors can truly know the reputation of the companies. And the credit rating is evaluated by independent agency without the interest with the company, and it is regulated by the government and FCA. The
34、 most authoritative agencies are Moodys and Standard and Poor. They evaluate the default probability of the companies.And many information need to be considered consist of the published accounts which the profitability and losses must be provided, the current market ratio and stock is additional inf
35、ormation, management including the employee turnover ratio, frequency of recruitment and staff training in the past 5 years and recent business planning to confirm profitability. Besides, according to their different business, the individual companies need to provide other information.Also, the defa
36、ult risk determines that the credit rating is inversely proportional to the coupon income. The companies with lower credit rating can attract investors by high coupon payment and irregular dividend.Inflation risks also cause economic losses to investors, the index-linked bonds can be effectively avo
37、ided, but corporate bonds dont have this type of bonds. Moreover, the increase of dividend tax by HMRC will also reduce the profits of investors.3.0 Corporate bond fund analysisBought corporate bonds through funds it is buying bonds of different credit rating companies, so that the income is higher
38、than that of direct investing. And its principle can be guaranteed. For individual investors, the purchase of bond funds can help them maximize spread the risk arising from default by the direct investing.The individual investors refer to the purchase of bonds for their personal accounts and usually
39、 with small amounts.The fund products income is mainly caused by the fluctuation of the financial market. If the state to formulate regulations or cancel the original financial regulations and the adjustment of central banks monetary policy to the basic interest rate will lead to the fluctuation of
40、the financial market. Besides, the change of the exchange rate of the main settlement currency which is the quantitative easing policy based on the dollar and variables in a particular financial sector such as banks, credit loan, and insurance are also important factors.The purchase of single corpor
41、ate bonds and fund products are determined according to the risk tolerance of investors and the profits of the similar products in the existing bond market and their future trends.The main income of the bond funds are comes from the fund index; it is a certain type of corporate bond cant determine t
42、he profit and loss of the whole funds. The extra boost is from the performance of the fund, but also from the float of the par value. The central bank to raise the interest rates and the value of bond and holdings will decline, if the bond funds managers made the wrong anticipation of the companys b
43、elow par value, the bounce rate is lower than expected, and the income of the fund will be lost.The main problems of the corporate bond funds are the fund index depends on the varied holding and the trading amount of the corporate bonds. And then, it can directly determine the value of the bond fund
44、s. Besides, the adjustment to the current basic interest rate will also affect its income.There are two corporate bonds. Tesco Plc issued a corporate bond named TESCO PLC 02/19 MTN with coupon 5.5%. And the issue price of TESCO PLC 02/19 MTN is 99.07 at date of 12/13/2002. Issue Volume is 350,000,00
45、0 and redemption date is 13 Dec 2019. Another corporate bond is the Royal Bank of Scotland PLC issued the bond at 2/1/2010; the coupon is lower than the Tesco Plc, which is 5.100%. Issue Volume is 50,000,000 at maturity on 2/1/2020. While the issue price of the Royal Bank of Scotland PLC is 100, so
46、the issue price and issue volume are both higher than the TESCO Plc. And, the payment time of both bonds is regular interest. 4.0 Introduction of Retail bonds and Mini bonds4.1 Retail bondsIn February 2010 the London Stock Exchange launched a retail bond market called Order Book for Retail bonds. It
47、 is one of the new types of bonds issued by the government to encourage more individual investors to participate in the bond market, as the minimum investment is lower. Through the diversification of bond types to reduce the situation of a certain type of bond to dominate the market, to further help
48、 companies for financing to strengthen the flow of funds and funds for existing operations to reduce reliance on bank borrowing.And the target is the small investors, which belongs to the idle funds in the society, and it can effectively obtain the remaining market share after the major bonds are occupied.In order to reduce the
