Fixed-Income Cash Flows and Types

A fixed-income instrument’s cash flows are determined by its features. In this module, we discuss common fixed-income instrument cash flow structures and their implications for issuers and investors. The module’s final lesson discusses the legal, regulatory, and tax considerations across jurisdictions faced by fixed-income issuers and investors.

• In contrast to standard bullet bonds with full principal repayment at maturity, amortizing bonds have a payment schedule that involves early repayment of principal. Sinking funds and waterfall structures represent special cases of amortizing bonds.
• Other coupon payment structures include index-linked bonds that offer payments adjusted for changes in price indices and bonds with step-up coupons, with coupons that increase by specific amounts in the future based on a schedule or subject to specific provisions.
• Fixed-income contingency provisions include call, put, and conversion features. A call feature grants an issuer the right to buy bonds back early at a fixed price, while a put feature grants an investor the right to sell bonds to the issuer at a fixed price prior to maturity. Convertible bonds grant investors the right to convert the bond into shares of the issuer’s stock at a pre-determined price.
• Bonds can be classified as domestic, foreign, or Eurobonds. Domestic bonds are those issued in a country by an issuer incorporated in that same country, while foreign bonds are issued by entities incorporated elsewhere.
• Eurobonds are issued internationally in a currency different from that country’s domestic currency (e.g. US dollar bonds issued in London) and are subject to fewer listing, disclosure, and regulatory requirements than domestic or foreign bonds.
• Bond interest earned by an investor is usually taxed as ordinary income, although some bonds offer tax advantages. Some countries also apply a capital gains tax. Specific tax provisions often apply for bonds issued at a discount or purchased at a premium.