Asset Pricing

KRW Straight Bonds

KRW Straight Bonds

  • The securities that institutions(Government, Public Organization, Corporations and ects.) issue to secure long-terms funds from general investors
  • The issuer will pay the bearer the interest and the principal agreed upon when the bond is issued and the date of repayment
  • Since the future cash flow is determined in advance, it is called fixed income security.
inform of Issuer, Investor, Coupon Rate, YTM, Yield To Maturity
Issuer Government, Local Government, Banks, Corporations
Investor Asset Management Company, Insurance, Bank, individual
Coupon Rate Commitment rate to be paid by the issuer when issuing bonds
Yield To Maturity (YTM) The rate of return that a bond investor is awarded holding until the maturity, the internal rate of return (IRR), or the present value discount rate

Stocks(Equities) V.S. Bonds(Fixed-Income)

inform of Classification(Capital Type, Investor, Privilege, Return on Investment, Fund Recovery), Stocks, Bonds
Classification Stocks Bonds
Capital Type Owners Equities Lenders to the Firm
Investor Share Holders Bond Holder
Privilege Voting rights, Dividend Interest Rights
Return on Investment Dividend Interest
Fund Recovery Market trade, Stock acquisition right Market trade, Hold until Maturity

Classification by issuer

inform of Classification(Government Bonds, Foreign exchange Stabilization Bond, Treasury Bonds, Strips, TIPS, National Housing Bond, Municipal Bond, Special (purpose) Bonds, currency stabilization bond, Bank Bond, Other Banks Bonds, Corporate Bonds, ABS, MBS), Description
Classification Description
Government Bonds To funds policy, central government issues bonds with approval from the congress
Foreign exchange Stabilization Bond To stabilize exchange rates, bonds issued by the government in the form of payment guarantees
Treasury Bonds In order to efficiently carry out the national treasury policy and the monetary policy, the securities issued by the Minister of Finance through the advice of the Monetary policy Committee
Strips Bonds traded in principal and interest, respectively. Each principal and interest is recognized as an individual discounted bond.
TIPS Bonds that reflect the inflation rate on the investment principal and then pay interest on it, an inflation-hedged product
National Housing Bond A bond issued for the purpose of raising funds for the construction of a national housing.
Municipal Bond Bonds issued by local governments such as municipalities and metropolitan cities in order to raise funds necessary for achieving specific objectives in accordance with the Local Finance Act
Special (purpose) Bonds Bonds issued by institutions established by special laws
currency stabilization bond In order to control the money supply, the Bank of Korea issue bonds under the Bank of Korea Act and Bank of Korea Monetary Stabilization Act
Bank Bond Bonds issued by specialized financial institutions and banks established under special law
Other Banks Bonds Bonds issued by institutions established by the Specialized Credit Financial Business Act
Corporate Bonds Issued by Corporation
ABS A financial security issued based on collateralized by a pool of assets
MBS A financial security issued based on mortgage loans on houses

Classification by Interest Payment Method

inform of Classification(Simple Interest Bond, Compound interest Bond, Discounted Bond, 복5단2채, Coupon Bond, Grace Bond), Description
Classification Description
Simple Interest Bond Simple interest payment, principal and interest will be paid on the maturity date
Compound interest Bond Compound interest payment, principal and interest will be paid on the maturity date
Discounted Bond a bond that is issued for less than its par (or face) value, discounted rate acts as interested rate.
Compound 5YR simple 2YR Compound interest payments are made for first 5 years, Simple interest payments are made for 2 years
Coupon Bond Interested payments are made periodically or irregularly
Grace Bond After a certain grace period, repayment of principal and interest are made

Types of Market

inform of Primarily Market, Secondary Market, Over the Counter Market OTC
Primarily Market The primary market is the part of the Capital market that deals with the issuance and sale securities to investors directly by the issuer
Secondary Market The secondary market is where investors buy and sell securities they already own
Over the Counter Market OTC A general term for a market where securities are traded outside the securities exchange and KOFIA brokerage markets. OTC is a market is where securities are traded between brokerage firms, generally referred to as an over-the-counter market.

Primarily Market

The secondary market is where investors buy and sell securities they already own

inform of Primarily Market

Secondary Market

The secondary market is where investors buy and sell securities they already own

inform of Secondary Market

OTC: Over the Counter Market

  • It is a market formed by trading practices. It is a market that is traded in a non-disciplinary manner outside the regular exchange market. Any financial products can be traded
  • A large number of bond transactions are concluded in the over-the-counter market and traded primarily through brokers
  • Since bonds investing requires sizeable capital per transaction, it is common to trade with institutional investors such as asset management companies, banks, pension funds, and insurance companies rather than individual investors
  • Provides liquidity to nonstandard bonds
inform of Amount per Trade, Trading Hour
Amount per Trade Min KRW 10 Bill is convention
Trading Hour 08:30~16:30 is convention but there is no set trading hours
Exchange VS OTC Trade Volume Comparison
inform of 2009~2014 Exchange VS OTC Trade Volume Comparison graph

Pricing Method

YTM Curve Pricing

In order to reflect the market price, the YTM Curve is used to evaluate the bonds, such as government bonds and monetary bonds which are very liquid in the market

Spot(Zero) Curve Pricing

To eliminating the Coupon Effect, use theoretical evaluation method by creating new Zero Curve to compensate for market traded price.