Trading Information

Call

If the Interest Rate Security contains a 'call' provision, the issuer usually retains the right to redeem (pay back) the debt, in full or in part, before the stated maturity date.

A call feature creates uncertainty as to whether the Interest Rate Security will remain on issue until its maturity date. Investors risk losing an Interest Rate Security paying a higher rate of interest if market rates fall and issuers decide to call in their Interest Rate Securities.

Because a call feature puts the investor at a disadvantage, callable Interest Rate Securities normally offer higher yields than otherwise would be the case.

Coupons

A coupon refers to the interest rate paid to the holder of an Interest Rate Security. Coupons can be fixed, floating or payable at maturity. Most debt securities traditionally have a coupon that is fixed until maturity, is a percentage of the face (principal) amount, and pay interest semiannually. For example, a $10,000 Interest Rate Security with an 5% p.a. coupon will pay investors $500 a year, in payments of $250 every six months. When the Interest Rate Security matures, investors receive the full face amount of the security (in this example, $10,000).

Some issuers and investors prefer having a coupon that periodically adjusts, and more closely tracks prevailing market rates. The coupon on a floating-rate Interest Rate Security is reset periodically in line with changes in a base interest-rate index, such as the rate on 90 day Bank Bills.

Factors that determine the price of an Interest Rate Security

The price you pay for an Interest Rate Security is based on a variety of factors, such as prevailing market interest rates, credit quality, maturity terms and tax status. Newly issued interest rate securities normally sell at or close to their face value. Prices of interest rate securities traded in the secondary market, however, fluctuate in response to changing interest rates. When the price of a Interest Rate Security increases above its face value, it is said to be selling at a premium. When a Interest Rate Security sells below face value, it is said to be selling at a discount.

Investors should be aware that some of the price movements will be due to the amount of interest accruing (accrued interest) on the securities each day.

Purchase Price

The purchase price (also known as the gross price) is the total amount that an investor pays for a bond. Purchase price comprises the number of bonds that an investor buys times the price paid for a bond.

The purchase price includes two components:

  • Capital Price which is the price of the bond as estimated by the market based on a number of variables including interest rates, maturity date, status and credit quality.
  • Accrued Interest on the bond which is the amount of interest accumulated on a bond since the last coupon payment. Because interest is paid at regular intervals the bond price increases daily by the amount of interest accruing. On a 6.50 per cent annual coupon, interest accrues at 1.78 cents per $100 per day. Immediately following the coupon payment the price will fall by the amount of that coupon payment.

The gross price of a bond is determined by adding any accrued interest to its capital price.