When a government or corporation needs to raise money, they can do so by issuing bonds. A bond is a security, usually of fixed value, that pays you interest until it is repaid at maturity.
Unlike stocks, bonds are typically very secure investments. While the price of a stock can fall to zero, the price of a bond will only fall to its face value (what you’ll get back when it matures).
Because bonds are relatively safe investments, they can be bought and sold via an organized market. There are two primary markets for bonds – the primary market and the secondary market. The primary market is where governments and corporations issue new bonds to raise money, and where investors buy these new bonds. The secondary market is where previously issued bonds are traded between investors.
This article will discuss what happens when more than one bond maturity dates occur on the same day.
Impact of spread
When the maturities of a bond issue are spread over several dates, the bonds are called stepped coupons. These bonds have lower liquidity than conventional bonds, which can make them more risky.
Because of the stepped coupon, investors receive a lower interest rate initially but then receive another higher interest rate later. This is done to balance out the price of the bond over its lifetime.
When the final maturity is reached, there is no longer a risk that the price will decline due to a lower interest rate. This makes stepped coupon bonds safer than conventional bonds with identical maturities.
The main disadvantage of stepped coupon bonds is that an investor cannot simply invest at one date and then sell at another date to get a higher return. Investing in these bonds requires constantly monitoring to see if the date has come for the higher interest rate payout.
What is the spread?
When the maturities of a bond issue are spread over several dates, the bonds are called coupon bonds. Coupon refers to the periodic payments made by the issuer to the holder of the bond.
The spread is the difference between the price at which a bond seller (the issuer) offers its bonds for sale and the price at which it will sell them to you (the buyer).
For example, a government bond may have a face value of $1,000 and pay semi-annual interest payments of $50. If the government sells those bonds through an agent for $950, then that’s its selling price. But if you want to buy one, it will cost you $950. The spread is therefore $50.
Similarly, if you want to buy those bonds, you’ll have to pay $950. You won’t get them for $945 or any other lower price.
Why are there multiple maturities?
When a country or company needs to issue new debt, they typically do so in the form of new bonds. These are sold in what is called the primary market.
When investors buy these new bonds, they will want to know that there will be time until the bond needs to be repaid.
However, governments can also reissue older bonds with longer maturities. In order to do this, the government must repay the initial amount on the bond plus some sort of interest.
By having both new and old bonds being reissued, there is an opportunity to have multiple bond maturities which spread out over time.
Who sells the bonds and to whom?
When a government or company issues debt, the buyer of that debt is called a purchaser. The purchaser can be an individual, bank, or other financial institution.
In the case of bond markets, most purchasers are financial institutions. This is because most individuals don’t have enough money to buy large government bonds, and banks typically don’t either.
Financial institutions typically purchase bonds as part of their investment portfolios. They do this in order to generate income for their investors and/or themselves. By purchasing government bonds, they are investing the funds of their investors in a safe asset.
Individual investors can also purchase bonds directly from the issuing entity. This allows for more flexibility in what kind of bond is purchased, but comes with greater risk due to lower security regarding the entity issuing the bond.
What is the underlying asset?
In the case of a vanilla bond, the underlying asset is the debt obligation. The issuer promises to pay you back at a certain date, with a certain interest rate.
In the case of cryptocurrency-backed bonds, the underlying asset is cryptocurrency. The issuer promises to pay you back at a certain date, with a certain interest rate, and part of that payment comes in the form of a specific cryptocurrency.
Depending on the platform you use to issue your bond, there may be additional options for underlying assets. For instance, Ethereum has its own token system that makes it easier to create customized assets. You could issue a bond partially in fiat currency and partially in tokens as repayment.
There are many different kinds of bonds, but this article will focus on vanilla bonds issued for ordinary government debts. These are what most people think of when they hear the word “bond”.
Do spreads always have an impact?
Although the term “spread” is generally used to refer to the difference between the price at which a security is sold and its underlying value, it can also refer to the difference between two securities.
In this case, the spread refers to the difference between the yield of a bond and the yield of a similar government bond. A wide spread would indicate that the investor perception of risk is higher for this bond, which would make it less attractive.
Yields are determined by factors such as expectations for inflation and overall economic growth, so if inflation is expected to increase, then so will yields on bonds that are comparable to yours.
When investing in corporate bonds, you should also be aware of potential default risk. Although defaulting on corporate bonds is not as damaging as defaulting on government bonds, it can still have significant effects on an organization.
What are the risks?
When the maturities of a bond issue are spread over several dates, the bonds are called maturing paper. The term “maturing paper” is somewhat of a disrepectful term, as it implies that the bond is worthless after a certain date.
Unlike traditional bonds, which have a single maturity date, this type of bond has many. This makes tracking its value more difficult, as its value can change on any given day depending on its next coupon payment or maturity.
The problem with maturing paper is that its value can fluctuate significantly between coupons or maturities. This can make it difficult to know exactly how much it is worth at any given time.
Because of this volatility in the bond’s price, investors may be reluctant to buy or sell it at exactly the right time due to fear of losing money.
How can I trade spreads?
You can trade spreads in the secondary market, but not every brokerage account will allow you to do so. Some accounts require you to hold the bond until maturity, which is not ideal if you plan on trading spreads.
Most accounts that allow you to trade spreads require that you pay some sort of transaction fee, which is why most people do not choose to trade them. It is also hard to find buyers and sellers since most people just hold bonds until they mature.
Because of this, spread bonds are not very liquid – that is, it may take a long time to find a buyer or seller. This can have consequences if the bond owner needs to sell before maturity due to an emergency.