Page 199 - A Canuck's Guide to Financial Literacy 2020

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Debentures have a higher level of risk and offer a higher rate of return than bonds
with similar characteristics.

Zero-Coupon Bonds/Strip Bonds

▪ Zero Coupon Bond is exactly what the name states. The bond pays no interest
payments which are known as coupons because the coupons are stripped and sold
separately. Because the zero-coupon bonds do not pay interest, they are sold at a
discount. Upon maturity, the bond holders receive the face value of the bond as it
gradually increases in value. They’re considered long term investments as they
mature in ten or more years.

Foreign Bonds

▪ A foreign bond is an investment that is issued by a foreign entity in the local market’s
currency. The foreign entity can be a government, municipality or a
corporation. Foreign bonds tend to have higher risk than domestic bonds due to their
exposure to interest rate risk and currency risk. Typical foreign bonds are mentioned
below. These are bonds denominated in the local currency of that country.

▪ Yankee bonds (in the U.S)
▪ Rembrandt bonds (in the Netherlands)
▪ Samurai bonds (in Japan)

▪ Matador bonds (in Spain)
▪ Bulldog bonds (in the UK)

▪ Maple Bonds (in Canada)
▪ Kangaroo Bond (in Australia)

Mortgage-Backed Securities (MBS)

▪ Mortgage Back Securities is when an issuer of MBS buys a portfolio or a pool of
mortgages from a certain type of mortgage originator, such as a commercial bank, as
an example. The bank essentially sells the stream of income that comes from the
payment of the mortgages. These payments are passed to the MBS holders, similar
to coupon payments for bonds.

▪ Mortgage Backed Securities filled with sub-prime loans were one of the main
contributors to the 2008 financial crisis. The housing bubble collapse triggered
mortgage delinquencies, foreclosures and devaluation of housing related
securities.