In case of a repurchase guarantee is provided to a bond by the issuer, there will be provisional costs, which is mainly caused by its continuous liability carried throughout the entire validity period, embedded in its pricing as part of the offer.

In case of an insurance policy of repurchase or guarantee for a value equivalent to its par value or issued price of a bond, the direct cost arisen from such a policy can be balanced or shared by the immediate parties concerned which include both the issuer and the bondholder. The percentage of the insurance coverage should usually translate both quality and risks of the assets as viewed by the insurer, which is in fact decisive for calculating the premium payable to the insurer for the provision of guarantee.

In case of a guaranteed or fixed annual dividend policy is adopted by the issuer, the provision of reserves in forms of cash or liquid assets, or revenues from other secure re-investment including inter or intraproducts should all be considered. As a fact that the annual dividend payout will be primarily based on possible earnings derived from interest. In order to diminish the influence of market and economic cycles that prevail the interest-rate condition, the spread-driven interest revenues derived from reserves still represent a significant source of income, other reliable investment strategies or hedging options should be considered on a total return basis as part of the earnings strength.

In case of a 100% profit sharing policy of both interest and principal over the life of a bond is adopted, annual yields may vary due to fluctuations in interest rates as well as timing and speed of principal repayments. This would in fact enhance the financial security and cash flow of the bond on a short-term basis but adversely affect the overall earnings performance on a time-weighted average basis due to the shrinking nature in its interest income profile caused by the decreasing principal, might be viewed as offering weaker vitality and funding ongoing growth.

In case of credit enhancements such as excess spread, reserve fund, other receivable generated from assets provided by the parents of issuers, overcollateralization, oversubscription, letter of credit, turboing, excess servicing, third party guarantees and subordination.

In case of securing certain adequate credit ratings from major credit agencies, additional credit enhancements may have to be provided or acquired from other sources that will in fact involve extra costs in such employment.

In case of a bigger than expected discount of the face value of a bond, issuers will have smaller rooms in facilitating sufficient incomes for meeting scheduled payment obligations, therefore, they will go for either putting up a higher portion of reserve fund, acquiring higher yielded receivable, providing extra receivable generated from other assets provided by their parents or third parties and so on.

In case of non-receivable generating collateralized assets, which mean issuers and sponsors have to facilitate substantial receivable generating mechanisms in the structures of the bond in order to meet those regular payment obligations.

In case of unfavorable market conditions such as sluggish property market, high inflation and deflation, lower GDP and high bankruptcy rate, zero interest effects, severe competitions, and oversupply, the pricing of the bonds will be affected and to the extent that demand for higher yields to compensate risks are expected by investors, which means a likely increase on the cost side due to extra provisions for payouts and protections required.

In case of changing interest rates, the overall costs of the bonds fluctuate. Since changing interest rates greatly affect the speed of prepayment for fully amortizing securities, stable incomes and scheduled repayments primarily determine the value of a mortgage security of this kind. The more accurate the prepayment projections, the more accurate the yield estimates. Costs of additional credit enhancements may have to be factored into the cost and price of the bonds.

In case of a new category of bonds or less frequently traded categories due to their unfamiliar structures, may receive lower market perception in the early stage, and will require extra promotional efforts to enhance the awareness as well as extra credit supports in the areas of yield and protection, which will result into higher costs. It is a common phenomenon that the newest categories tend to have lower volatility than the most common categories in the bond market

In case of smaller size or low volume of transaction of a bond, extra efforts are required to boost for higher liquidity as mentioned previously that will certainly involve a higher cost.

In case of downturns in both land and property markets, the total issuing costs of bonds will be comparatively higher due to the shrinking size of loan being raised from the market. Again, it may cause the perception of investment risks in bonds to increase; as a result, higher yields and extra credit enhancements are needed to entice investors.

In case of “bullet” repayment of principal at maturity, investors will usually demand higher interest rates than the coupon rates for scheduled payments. Therefore, stronger receivable and more accurate cash flows derive from the underlying assets become critical to issuers and sponsors, which may require extra credit supports in some cases.

Credit Quality. The most common translation of the credit quality of a bond is its credit ratings assigned by one or more of the following rating agencies, Standard & Poor Rating Services, Moody’s Investors Service, Fitch IBCA or Duff & Phelps Credit Rating Company. The agencies’ determination of the required credit enhancement is based on the characteristics of the collateral, earnings adequacy and its operational performance under severe stress –- specifically, under hypothetical “depression” scenarios.

Collateralized Assets. Collateralized assets usually consist of financial assets that back the bond, which include the land, parental and third party guarantees, and insurance. The creditworthiness of a bond derives substantially from the payment abilities of the originator, guarantors, insurers of the underlying assets as well as sources of receivable generated from the assets. The quality of guarantees and to the greater extent the coverage of the insurance represents the ultimate internal protections to the bonds. A variety of external credit supports are employed to increase the likelihood that other payment obligations can be met. In a word, the quality-collateralized assets being structured to a bond certainly affect the price of a bond to a great extent.

Interest Rates. Changes in interest rates do not affect all bonds equally. Obviously, the effects between a fixed interest bond and a floater might be significant. Highs and lows during changing of interest rates have reversing impacts of the two extremes, since the repayment speed tends to accelerate at lower rates that might shorten the average life of a bond and vice versa, the life expectancy of a bond may be extended due to a longer principal repayment period when the rates are at highs. Virtually fixed income bonds have higher premiums or lower discounts on their face values over floaters due to their more stable and predictable natures.

Yields. The current yield and yield to maturity or yield to call differentiate the earnings pattern of a bond. Current yield is the annual return on the dollar amount paid for the bond and is derived by dividing the bond’s interest payment by its purchase price. Yield to maturity or yield to call is the total return received by holding the bond until it matures or is called. Furthermore, credit supports of the yield enhance surety of these payments and will therefore; have an effect on the bond price.

Supply and Demand. The supply and demand of certain types of bond under different prevailing market conditions surely affects the issuing value and yield expectation of the bond.

Life Expectancy. Different lengths of life expectancy reflect different yields and risks, as short-term securities (most of which are 5 years or shorter), which are comparatively stable and less risky than long-term securities, provide lower investment returns. On the contrary, long-term securities (most of which exceed 12 years) ensure greater overall returns despite of longer exposure risks in interest rate, market and credit fluctuations.

Redemption Features. Certain structural features such as call provision whether it is “yield to maturity” or “yield to call” can substantially change the expected life of investment as well as its total return to investment. In the case of a “yield to call” option, a higher annual return is expected to compensate the risk that bonds might be called early.

Size and Volume of Transaction. Both size and volume of transaction of a bond reflect its attractiveness as well as market participation, which affect the issuing price of a bond as well as the “real” time-weighted values of the bond from time to time. 

Market Conditions. Market conditions are in fact the most prevailing factor that affects the price of a bond at the time of issuance or after trade starts. Market conditions may be predictable but not controllable to the fact that changing interest rates, inflation or deflation, supply and demand, weaker than expected economic downturns, governmental budgetary deficits, foreign exchange turmoil, lower or negative GDPs, and higher bankruptcy and unemployment rates, significantly affect investment expectations and behavior which would be resulted to a bigger pricing discount at the time when a bond is issued as to entice investors.