I am also relatively unfamiliar with bonds and notices this post by 'A Dashing Blade' in another section:
"Hows about buying ISK denominated bonds? You should be able to pick them up through a stockbroker, as of this moring, AAA rated commercial paper avaiable is . . .
NIB 11.5 09/07 ISK 98.833/ 99.583 14.248/11.933
DB 11.25 09/07 ISK 98.757/ 99.007 14.241/13.470
EXPT 8.5 09/07 ISK 98.086/ 98.586 13.979/12.405
KFW 8.25 09/07 ISK 97.728/ 97.828 14.242/13.954
RENTEN 12.0 10/07 ISK 98.822/ 99.122 14.180/13.406
SEK 12.5 10/07 ISK 98.939/ 99.439 14.131/12.961
AAB 14.0 01/08 ISK 99.973/100.123 13.411/13.176
DB 12.5 01/08 ISK 99.282/ 99.582 13.121/12.658
RABOBK 13.5 01/08 ISK 99.582/ 99.832 13.598/13.226
KFW 11.0 02/08 ISK 98.574/ 99.474 13.078/11.774
RABOBK 11 04/08 ISK 98.796/ 98.996 12.353/12.103
Dammit, can't get the formatting right! (Bond, Coupon, Maturity, Bid/Ask Price and Bid/Ask Yield are the columns)
All are annual bonds so anything maturing in less than a year is (effectively) a zero coupon bond. ie the KFW 11% of Feb 08, pay 99.474 now, to receive redemption amount + final coupon of 100 + 11 = 111 at maturity."
I notice the bonds have the highest rating (AAA) and wondered:
a) What the potentil pitfalls are. Why buy any other type of bond paying a lower coupon i.e UK gilts when such high coupons are available on these bonds?
b) Why choose to invest in any other bond on that list that isn't the one paying the highest coupon as the redemptin dates are all so similar?
As I said I have never really been involved with bonds and would love to understand them a bit better.
You're confusing "coupon" with "yield", a bond with a coupon of 10% will yield you less than 10% if you buy it for more than 100 and vice versa.
Wrt to point a), maybe a bit of background on those issues would be useful . . . say you are a AAA global company/organisation. You borrow money (ie issue a bond, a bond being, after all, little more than an IOU that pays a bit of interest) all the time to fund various activities.
Now, because your credit is so good (AAA, the best you can get) you should be able to borrow (say) EUR for (say) 1 year at slightly under the "official" 1 year rate. Probably about 0.15% under in fact.
However, an specialist desk at a large investment bank has noticed (via trades going through its books) that there is huge demand for (say) ISK denominated bonds at the moment for one reason or another (actually, wrt ISK, it's to do with parking borrowed ISK's in some form of interest bearing security as hedge funds do "carry trades", but I digress . . .).
So this bank suggest to you that you actually issue your bond (ie borrow money) in ISK's and, even better still, because you're AAA rated, demand will be so high that you will be able to borrow at (say) 1.5% under the inter-bank rate!
Better still, the trading desk will do all this for you (paper work, sell the bond, maintain an orderly after-market etc) AND match the bonds cash flows to a (say) ISK/EUR currency swap to fix the EUR amount of c oupons that you pay out.
Happy days! You (the issuer) on a net net basis, are effectively borrowing at (say) 0.65% under the EUR 1 year rate.
And the trading desk has made approx 1m EUR in fees.
