we can go a step further. In January 2015, we can have 6% coupon bonds denominated in US dollars or in euros. The point we are trying to make is that there are an enormous number of debt securities in the market compared to the variety of equities.
For instance, in the case of municipal bonds in the US, which are very popular with investors seeking tax-free returns, an investor has a choice of close to 2 million securities. Considering this and the fact that the psychology of bond investors is different, it is obvious why most fixed income securities are not actively traded. A second consequence of the fact that there are an enormous number of bond issues available is that security identification becomes critical for a potential investor. That is in addition to the issuing firm or government, the coupon, the maturity date, and, if required, the currency as well, should be clearly specified.
Interest on bonds is paid out of pre-tax profits, that is, coupon payments represent a tax-deductible expense for issuers. Thus, coupon receipts are invariably taxed at the hands of the investor. The tax-deductible feature of such securities also provides equity shareholders with leverage. That is, equity returns get magnified since payments to bondholders are fixed in nature.
The writer is the author of ‘Fundamentals of Financial Instruments’, published by Wiley, India