[Finance]
[Why debt security yields vary]
There are numerous circumstances that influence the earnings on debt securities and make them alter. The most important of them are:
Variances in term to maturity.
The factor of liquidity.
An impact of taxation.
Credit risk impacts the earnings on debt securities in the next way: the higher is the credit risk, the higher are yields accordingly. It is essential to take into account that credit rating organizations charge with a certain amount of fee for estimating credit risk. Moreover, the accuracy and oversight of such rating agencies are also to be considered as an important factor.
How does the liquidity influence the revenue on debt instruments? The answer to this is the lower a rate of the liquidity of a bond, the higher the level of profitability favored by financial speculators, analytics and investors.
The status of tax makes a big difference as well because of two reasons:
1) Financiers are more worried about the income which remains after taxation;
2) Taxable debt financial instruments should offer bigger before-tax earnings.
Logically, the higher is the level burdening with a tax of a debt security, the less revenue an investor will receive respectively. In this respect, such taxable bonds should definitely offer a higher level of revenues to receive before taxation.
Time to maturity has an impact on earnings on debt securities as well. The issue is that due dates of payment (or maturity dates) are various depending on the type of a particular debt financial instrument. What is more, the relation between annualized income and time to maturity is determined by the time period structure of loan fees (interests) (Madura, 2016).
Generally, the longer the life of a financial security (bond) and the lower issuer’s credit rating, the greater will be earnings to maturity (HKEx Cash Market Development & Operations, 2005).
All aforementioned aspects make earnings on a debt financial instrument to vary and that is why each of them must be taken into consideration.
However, among other elements which play a significant role in moneymaking on debt securities, the following factors should be highlighted: interest rates, conditions of the economy, characteristics of the financial instrument, sort of the issuer (government or municipal authorities, corporations, etc.). Furthermore, investors meticulously monitor the issuers’ credit worthiness as well as spheres where operations are conducted. Industry segments have distinctive reward and rates of ventures ("Yield on Debt Securities and Other Investment Instruments", 2016).
Finally, let us apply the aforementioned concept to our future job, for example, typical trader, financial analytics or just an investor. How can this knowledge help us in our professional success? While mastering the basics of finance and incorporating all factors gives us a chance for any of finance-related job or career opportunities to trade using debt securities and only benefit from it. Appling the knowledge and skills on the practice will boost chances to maximize the appropriate revenue, mitigate or avoid any financial risks and teach us how to use money wisely and trade efficiently.
References
Madura, J. (2016). Financial Markets and Institutions (10th ed., pp. 3-6).
Retrieved 11 June 2016, from http://www.accountingcoach.com/accounting-equation/explanation
Yield on Debt Securities and Other Investment Instruments. (2016).
Financialized.com. Retrieved 11 June 2016, from http://www.financialized.com/ /Investing/yield-on-debt-securities-and-investment-instruments
HKEx Cash Market Development & Operations (2005). Debt securities.
Retrieved 11 June 2016, from https://www.hkex.com.hk/eng/prod/secprod/debt/Documents/debt%20securities.pdf
