Section 10 - Chapter 3 - Fixed Income Bonds.pptx

Section 10 - Chapter 3 - Fixed Income Bonds - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus
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1. Chapter 3 - Fixed Income /Bonds SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda Fixed Income/Bonds What Are Bonds? Benefits for Investors Major Issuers of Bonds Components of a Bond Typical Information in a Bond Quote Yield Curve What Does a Technical Analyst Need? This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. Fixed Income/Bonds Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. Bonds 🔑 Key Facts About Bonds 1. Definition: A bond is a fixed-income investment where an investor lends money to an entity (corporate, government, or municipal) in exchange for periodic interest payments and the return of principal at maturity. 2. Issuer Types: o Government Bonds (e.g., U.S. Treasury, municipal bonds) o Corporate Bonds (investment-grade & high-yield/junk) o Municipal Bonds (issued by local governments, often tax-free) 3. Yield: The return an investor gets on the bond, impacted by interest rates. 4. Maturity: The time until the bond pays back principal (short-term: <3 years, medium-term: 3-10 years, long-term: 10+ years). 5. Risk & Rating: Rated by agencies like Moody’s, S&P, and Fitch (AAA = safest, C/D = high risk). 6. Interest Rate Sensitivity: Bond prices move inversely to interest rates.

5. Bonds Cheat Sheet: Bonds Component Description Impact on Investors Face Value (Par Value) The principal amount repaid at maturity Determines initial investment & final payout Coupon Rate Fixed interest paid periodically Higher coupon = higher income Maturity Date The bond's lifespan (e.g., 5, 10, or 30 years) Longer maturity = higher risk & yield Yield to Maturity (YTM) Total return if held to maturity Accounts for price fluctuations Current Yield Annual coupon payment ÷ current price Higher if bond price falls Duration Price sensitivity to interest rate changes Higher duration = greater risk Credit Rating Bond issuer’s ability to repay AAA (safest) to C/D (default risk) Call Option Issuer can repay bond early Risk of reinvestment at lower rates Put Option Bondholder can sell bond back early Protects against interest rate rises Convertible Feature Can be converted into company stock Potential for higher returns

6. Bonds 📊 Bond Comparison Table Feature Treasury Bonds Corporate Bonds Municipal Bonds High-Yield (Junk) Bonds Issuer U.S. Govt Companies Local/State Govt Risky Companies Risk Level Low Moderate-High Low-Moderate High Return Low Higher than Treasuries Tax-advantaged Very High Liquidity High Moderate Moderate Low-Moderate Interest Rate Sensitivity High Moderate Moderate Low

7. Bonds 📈 Bond Interpretation Guide 1. When Interest Rates Rise → Bond prices fall (newer bonds offer better yields). 2. When Inflation Rises → Bonds become less attractive (fixed payments lose value). 3. Recession Protection → Government bonds are safer, corporate bonds may default. 4. Yield Curve Analysis: o Upward Sloping: Normal economy, long-term bonds pay more. o Flat/Inverted: Recession signal (investors expect rates to fall). 5. Credit Ratings Impact: o Investment Grade (AAA - BBB-): Safer, lower returns. o Junk Bonds (BB+ & below): Riskier, higher returns.

8. Bonds Benefits of Investing in Bonds Steady Income Stream Capital Preservation & Lower Risk Portfolio Diversification Predictable Returns Inflation-Protection Options Tax Advantages Wide Range of Choices Liquidity & Market Accessibility Potential for Capital Appreciation

9. Bonds 🔹 Who Should Invest in Bonds? ✔ Retirees & Income Seekers → Stable, predictable income. ✔ Risk-Averse Investors → Lower volatility than stocks. ✔ Diversifiers → Reduce overall portfolio risk. ✔ Tax-Conscious Investors → Take advantage of tax-free municipal bonds.

10. Major Bond Issuers Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

11. Major Bond Issuers 🔑 Key Facts on Major Bond Issuers Bonds are issued by various entities, each with different risk levels, returns, and purposes. The four major issuers are: 1. Government Bonds (e.g., U.S. Treasury, UK Gilts, Japan Government Bonds) 2. Municipal Bonds (issued by local/state governments) 3. Corporate Bonds (issued by private and public companies) 4. Supranational & Agency Bonds (issued by global organizations like the World Bank, IMF, or Fannie Mae)

12. Major Bond Issuers Cheat Sheet: Major Bond Issuers Issuer Type Description Risk Level Typical Yield Tax Benefits Government Bonds Issued by national governments (e.g., U.S. Treasuries, UK Gilts) Low Low U.S. Treasuries are state/local tax-free Municipal Bonds Issued by local/state governments for public projects Low to Moderate Moderate Often tax-free at federal & state levels Corporate Bonds Issued by businesses to raise capital Moderate to High Higher than gov’t bonds Taxable Supranational Bonds Issued by global organizations (e.g., World Bank) Very Low Low Taxable Government Agency Bonds Issued by entities like Fannie Mae or Freddie Mac Low to Moderate Moderate Some are tax-advantaged

13. Major Bond Issuers Comparison of Major Bond Issuers Feature Government Bonds Municipal Bonds Corporate Bonds Supranational Bonds Issuer National governments State/local governments Private/Public companies IMF, World Bank, EU, etc. Default Risk Very Low (esp. U.S. Treasuries) Low to Moderate Moderate to High Extremely Low Liquidity High (esp. U.S. Treasuries) Moderate Varies by company & rating High Returns (Yield) Low Moderate Higher than Gov’t Bonds Low Interest Rate Sensitivity High Moderate Moderate to High High Tax Benefits U.S. Treasuries: No state/local tax Often tax-free Taxable Taxable

14. Major Bond Issuers Interpretation & Market Trends 1. Government Bonds as Safe Havens o Investors flock to Treasuries during economic crises, driving yields down. o Example: During recessions, U.S. Treasury bond prices rise. 2. Municipal Bonds for Tax-Free Income o Best for high-income investors seeking tax-free interest income. o Less risky than corporate bonds but offer better returns than Treasuries. 3. Corporate Bonds: Balancing Risk & Return o Investment-grade bonds (AAA - BBB) → Lower risk, steady returns. o High-yield bonds (BB & below) → Higher returns but riskier, often move with stock markets. 4. Supranational Bonds for Global Stability o Extremely safe but low yields, best for ultra-conservative investors.

15. Bond Quote Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

16. Bond Quote Key Facts About Bond Quotes 1. Quoted as a Percentage of Face Value o Bond prices are quoted as a percentage of their par value (usually $1,000). o Example: A bond quoted at 98.50 means it’s trading at $985 (98.5% of $1,000). 2. Bid & Ask Prices o Bid Price: What buyers are willing to pay. o Ask Price: What sellers are asking for. o Bid-Ask Spread: The difference between the two, indicating liquidity. 3. Coupon & Yield Information o Coupon Rate: Fixed annual interest as a percentage of face value. o Current Yield: Annual coupon payment ÷ Current bond price. o Yield to Maturity (YTM): Total return if the bond is held until maturity.

17. Bond Quote Key Facts About Bond Quotes 4. Maturity Date o The date when the issuer repays the principal. o Longer maturities often mean higher yields but more risk. 5. Credit Rating o Ratings by Moody’s, S&P, or Fitch indicate risk (AAA = safest, C/D = highest risk). 6. Call & Put Provisions o Callable Bond: The issuer can repay early (investor risk). o Puttable Bond: The investor can sell back early (investor benefit).

18. Bond Quote 📜 Cheat Sheet: How to Read a Bond Quote Column Meaning Example Issuer Name of the bond issuer U.S. Treasury, Apple Inc. Coupon Rate Fixed interest rate 5.00% Maturity Date When principal is repaid 12/15/2030 Bid Price What buyers are willing to pay 98.75 (=$987.50) Ask Price What sellers are asking for 99.25 (=$992.50) Yield to Maturity (YTM) Total return if held to maturity 5.10% Current Yield Annual interest ÷ Market price 5.05% Rating Creditworthiness of issuer AAA, BB, etc. Call Date When the bond can be repaid early 06/15/2028

19. Bond Quote 📈 Interpretation of a Bond Quote 1. If Price < 100 (Par Value) → Bond is trading at a discount (below face value). 2. If Price > 100 → Bond is trading at a premium (above face value). 3. Higher Yield to Maturity (YTM) = Higher Return, Higher Risk 4. Tighter Bid-Ask Spread = More Liquid Bond (easier to trade). Lower Credit Rating = Higher Risk = Higher Yield (Compensation for Risk). Key Takeaways ✔ Investors seeking stability → Look for high-rated bonds (AAA/AA) with stable yields. ✔ Traders looking for profit → Watch for price changes & bid-ask spreads. ✔ Income seekers → Focus on high-coupon or investment-grade bonds.

20. Yield Curve Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

21. Yield Curve The yield curve is a graphical representation of bond yields across different maturities. It helps investors understand interest rate expectations, economic conditions, and investment strategies. 🔑 Key Facts About the Yield Curve 1. Definition o The yield curve plots bond yields (interest rates) on the Y-axis and bond maturities on the X-axis. o Typically based on U.S. Treasury Bonds (risk-free benchmark). 2. Types of Yield Curves o Normal Yield Curve → Upward-sloping (long-term rates > short-term rates). o Inverted Yield Curve → Downward-sloping (short-term rates > long-term rates, recession signal). o Flat Yield Curve → Little difference between short- and long-term rates (economic uncertainty).

22. Yield Curve 🔑 Key Facts About the Yield Curve 3. What the Yield Curve Signals o Steep Curve → Strong economic growth, rising inflation. o Flat Curve → Economic slowdown, uncertainty. o Inverted Curve → Possible recession ahead. 4. Yield Curve & Interest Rates o When central banks raise rates, short-term yields increase, flattening/inverting the curve. o When they cut rates, short-term yields drop, steepening the curve. 5. Key Yield Curve Rates to Watch o 2-Year vs. 10-Year Spread → A key recession predictor. o 3-Month vs. 10-Year Spread → Used by the Federal Reserve for economic forecasting.

23. Yield Curve Cheat Sheet: Yield Curve Types & Interpretation Yield Curve Type Shape Meaning Investor Strategy Normal Curve Upward-sloping Economic growth, rising inflation Favor stocks, short-term bonds Steep Curve Steeper slope Strong growth, rising inflation Prefer long-term bonds before rates rise Flat Curve Nearly horizontal Slowdown expected Hold cash, defensive assets Inverted Curve Downward-sloping Possible recession Shift to safe assets (Treasuries, gold)

24. Yield Curve How to Use the Yield Curve for Investing 1. Normal Yield Curve → Invest in short-term bonds (less risk, decent yield). 2. Steep Yield Curve → Lock in long-term bonds before rates increase. 3. Flat Yield Curve → Stay in cash or short-term bonds (recession may be near). Inverted Yield Curve → Avoid stocks, focus on safe-haven assets (government bonds, gold). Key Takeaways ✔ Investors track the yield curve to predict economic cycles. ✔ A steep curve favors riskier investments, while an inverted curve signals caution. ✔ Long-term bondholders should watch for yield curve changes to time bond purchases. .

25. Yield Curve

26. Yield Curve Normal Yield Curve A normal yield curve implies investors are confident that the economy will grow more quickly, and mortgage and loan rates would follow the yield curve. In practice, longer-term loans require a higher interest rate than shorter-term ones.. Flat Yield Curve A flat yield curve would also mean that the difference between long and shorter-term rates is insignificant. Inverted Yield Curve An inverted yield curve is downward sloping and signals an economic recession. Investors would typically have low confidence in the economy, and the yields on bonds with a shorter duration are higher than those with a longer duration. Humped Yield Curve A humped yield curve, also known as a bell-shaped yield curve, is a rare type of yield curve that occurs when interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments.

27. Chapter 4 - Futures SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia