Question

Q.3. a) Identify the features of bond market. Critically examine GCC bond markets?

      b) Determine the present value of a bond with a face value of OMR 1000, coupon payment of OMR 90, a maturity period of 10 years for the expected yield to maturity of 10%.?

Answer 1

When you invest in a bond, you are lending money to the bond issuer. Bonds are often referred to as income investments because, in return for the use of your money, the bond's issuer agrees to pay a certain rate of interest at regular intervals for a set period until the bond matures or the principal is otherwise repaid.

Features

• Set Maturity Dates — bonds have set maturity dates that can range from one to 30 years — short-term bonds (mature in three years or less), intermediate bonds (mature in three to ten years) and long-term bonds (mature in ten years or more)
• Interest Payments — bonds typically offer some form of interest payment; however, this depends on their structure: "Fixed Rate Bonds" provide fixed interest payments on a regular schedule for the life of the bond; "Floating Rate Bonds" have variable interest rates that are periodically adjusted; and, "Zero Coupon Bonds" do not pay periodic interest at all, but offer an advantage in that they are can be bought at a discounted price of the face value and can be redeemed at the face value at maturity
• Principal Investment Repayment — bond issuers are obligated to repay the full principal amount of a bond in a lump sum when the bond reaches maturity
• Credit Ratings — You can evaluate the "default risk" (the risk that the issuers won't be able to make interest or principal payments) of a bond by checking the rating it has been given by a bond rating agency such as Moody's Investors Service or Standard and Poor's
• Callable Bonds — If the bond has a "call feature", the issuer is allowed to redeem the bond before its maturity date, repay the loan and thus, stop paying interest on it
• Minimum Investment — Bonds are usually issued in $1,000 or $5,000 denominations

Benefits

• Bonds can be a reliable source of current income depending on the structure of the bond you buy
• Bonds provide a certain element of liquidity, as the bond market is large and active
• If you sell a bond before it matures, you may receive more or less than your principal investment because bond values fluctuate
• Generally, interest income from federal government bonds is exempt from taxation at the state and local level, and the interest income from municipal bonds is usually not subject to federal tax
• In the spectrum of the investment options, investment grade bonds are a relatively low-risk investment

Types of Bonds

• Corporate bonds — represent money borrowed by a corporation or institution
• Municipal Bonds — are issued by states, counties, cities and local government authorities
• U.S. Government Securities — are issued to finance operations of the federal government and are backed by the full faith and credit of the government

GCC fixed income is an overlooked asset class, and one that we believe most active managers do not have significant exposure to. Given that increasing allocation to GCC bonds may improve returns, reduce volatility and enhance diversification, investors may want to consider opportunities to invest across GCC bonds as they search for a new source of alpha in today’s differentiated fixed income environment.

These qualitative and quantitative characteristics, most of which we expect to persist, enable GCC bonds to provide compelling portfolio construction benefits. As shown below, when added to a traditional set of asset class proxies within the framework of a constrained portfolio optimization, GCC bonds can constitute an important and large portion of the core fixed income allocation in a diversified portfolio under a variety of objectives.