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Types of Bonds
CPI - Indexed Bonds
Dollar - Indexed Bonds
Nonindexed BondsThe regulations defining the features of each bond stipulate the bond's indexation structure (principal and interest), the type of interest paid (fixed or floating rate), the issue term offered, and the dates of payment of principal and interest. The regulations give the Ministry of Finance a certain degree of freedom in determining the term to maturity and the size and timing of the issuance of each series. All subseries of a specific series are traded together as a single series. Each series is issued on a current basis over the course of several months. A new subseries complements the subseries that have already been issued and is combined with them to form a single series. The bonds pay interest from the date of issue of the first subseries. Therefore, subsequent subseries are credited with an accrual of interest, as reflected in the auction price and the market price. The bonds are classified by two criteria: 1. Type of indexation: to the CPI, to the U.S. dollar, or nonindexed. 2. Type of interest: fixed or floating rate. CPI - Indexed Bonds Israel began to issue CPI-indexed bonds due to a protracted period of inflation. These bonds guarantee the investor a real yield irrespective of the inflation rate. The bonds are fully indexed (principal and interest) to the Consumer Price Index (CPI) published on the fifteenth of the month after the month to which the CPI pertains. The bonds are indexed by adding the rate of increase in the CPI that is known on the date of payment to the CPI that is known on the date of issue of the first subseries, for current payment of either interest or principal (at the end of the bond term). Since the actual inflation rate for the term of a bond is released later, there may be a difference between the rate of indexation received by the bondholder and the actual rate inflation during the same period. The difference affects the rate of real yield on the bond to some extent. For example, a bond series in which the first subseries was issued on May 2, 2001, was indexed to the CPI for March, which was published on April 15, 2001 (henceforth: the base CPI). The second subseries (for the purpose of our example), issued on May 25, 2001, was indexed to the same base CPI. Accordingly, between the issue of the first and the second subseries, interest and indexation differentials have already accrued on the bond and are reflected in the price of the series in both the primary and the secondary markets. All subseries issued for this series are indexed to the same base CPI as the first subseries. Since April 30, 2002, the interest rate designated for the bond has been paid on all its subseries, plus the rate by which the CPI for March 2002 (published on April 15, 2002) exceeds that for March 2001. The characteristics of the different types of bonds issued, as defined in the regulations, are described below.  Fixed-Rate Bonds Galil: An indexed bond that can be issued for a term of 2 to 30 years at a fixed annual rate. The interest rate is the weighted average of all CPI-indexed fixed-rate bonds in circulation. Interest is paid annually. When each coupon (interest payment) is calculated, the precise period that elapsed between the date when the issue of the series started and the date of the coupon is taken into account. The principal is paid on the day when the last coupon is due. Galil bonds have been issued by auction since 1985, for terms to maturity up to 20 years. Dollar - Indexed Bonds These bonds are indexed to the official exchange rate of the US dollar, from the rate known at the date of issue of the first subseries until two days before payment (of principal and/or interest). Gilboa: A dollar-indexed bond issued in terms to maturity of 3-20 years (usually issued for a 8 years maturity), with floating interest paid at six-month intervals. The rate of interest for the subsequent half-year is based on the LIBOR six-month dollar interest rate as advertised two business days before the period on which interest is paid, with a possibility of setting a pre-announced differential from LIBOR for each series. The date of the coupon (plus exchange-rate differentials) is set at six months after the issue of the first series. The Gilboa bond was first issued in 1981. The method of calculating the interest was changed a number of times. Since 1999, the interest rates on the series issued are equal to the LIBOR rate. This bond has not been issued since January 2000. Nonindexed Bonds Fixed-Rate Bonds Shahar: A nonindexed bond bearing a fixed annual interest rate and issued to a term of up to 20 years ("Plain Vanilla"). The interest paid is the nominal value of the bond multiplied by the annual interest rate. The Shahar bond was first issued in August 1995 for a two-year term. Currently, it is issued for periods of five, seven, and ten years. The Shahar is now the most traded bond in the security market. Floating-Rate Bonds New Gilon: A nonindexed floating-rate bond issued to a term of 1-25 years. Interest is paid once every three months on the last business day of the month. Interest accrues from the first of the month in which the first subseries was issued. The annual interest rate is the weighted average yields of Treasury bills series to a 3-12 month term to maturity, in the ten-day period preceding the interest period. The New Gilon bond has been issued since April 1999 and is currently issued for a ten-year term. Characteristics of Bond Series
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