Overhanging bonds
Table of Contents
Overhanging bonds
An overhang refers to the possible dilution of the value of equity investments due to stock options that are about to be converted to equity shares. The dilution impacts earnings per share and return on investment per share. Overhanging bonds are a market phenomenon that arise when many bonds from a single issuer go unsold or untraded. Overhanging bonds are relevant to market participants because they affect bond prices, liquidity, and trading dynamics. Overhanging bonds can provide insights into market mood and prospective investment opportunities if monitored and analysed.
What are overhanging bonds?
An overhanging bond is a market situation in which a substantial supply of bonds from a single issuer remain unsold or untraded. This excess supply puts downward pressure on bond prices while raising bond yields.
Overhanging bonds usually emerge when market demand is insufficient to absorb the supply, which can be caused by changes in investor sentiment, issuer-specific concerns, or market conditions. Investors watch overhanging bonds because they can affect the pricing and liquidity of existing bonds in the market. Market participants must consider overhanging bonds when evaluating investment opportunities and controlling risk.
Understanding overhanging bonds
Overhanging bonds are bonds that stay unsold or untraded in the bond market due to a massive supply of bonds from a given issuer. The presence of overhanging bonds puts downward pressure on bond prices and upward pressure on bond yields because investors may be hesitant to purchase the surplus supply of bonds, resulting in lower prices to entice purchasers.
The excess supply also impacts bond liquidity and trading activity. Market participants widely monitor overhanging bonds because they might provide insights into market mood and affect investing plans. The overhanging bond issue can be often resolved by restoring investor confidence or changing market circumstances to absorb excess supply.
How do we have overhanging bonds?
Overhanging bonds are the result of an imbalance in the bond market’s supply and demand. A substantial quantity of unsold or untraded bonds generates a market overhang. Changes in investor mood, issuer-specific concerns, or market conditions can all contribute to this surplus supply.
Bond prices are pushed lower by overhanging bonds, while bond yields are pushed upward because investors may be hesitant to acquire the surplus supply of bonds, causing prices to fall and yields to rise to entice buyers.
Overhanging bonds can impact the pricing and liquidity of existing market bonds. Investors frequently monitor overhanging bonds because they can provide insights into market conditions and impact investment decisions.
How do we find if there are overhanging bonds?
The following steps should be followed to calculate if there are overhanging bonds:
- Begin by determining the total number of bonds issued by the specified issuer. This information is typically provided in the bond prospectus or financial statements.
- Determine the number of bonds that have previously been sold and are actively trading in the market. This information can be collected through market data sources or financial reports.
- Subtract the entire supply of bonds from the total supply of outstanding bonds. The outcome will offer you the number of bonds regarded as overhanging, i.e. the surplus supply.
Example of overhanging bond
Company XYZ intends to issue 10,000 bonds with a face value of US$1,000 each, for a total supply of US$ 10,000,000 in bonds. However, due to market conditions, investor mood, or issuer-specific issues, only 6,000 bonds have been sold and are actively trading in the market.
Overhanging bond = Total supply of bonds – outstanding = 10,000 – 6,000
Overhanging bond = 4,000 bonds
In this situation, there are 4,000 overhanging bonds, which reflect the surplus supply of bonds that have yet to be sold or traded in the market. This excess supply may put downward pressure on bond prices and upward pressure on bond yields, altering the pricing and liquidity of existing bonds.
Frequently Asked Questions
Stock overhang is the term used to describe an oversupply of a specific stock on the market, which pushes its price lower. It occurs when a few stockholders own a significant block of stock shares, increasing the likelihood of a price drop if they sell them all at once.
This may occur for various reasons, including when a major institutional investor decides to sell a sizable amount of his holdings or when a business sells new shares through a secondary offering.
Due to the imbalance between supply and demand, the stock overhang can negatively affect the stock’s price performance. Investors carefully watch for a stock overhang since it might indicate possible selling pressure and affect their investing choices.
A bearish overhang in the financial markets refers to a situation in which there is a negative feeling or anticipation regarding the future direction of a certain asset or market. It is marked by an excess supply of sellers eager to sell their assets at cheaper prices, causing the price to fall. Poor economic data, geopolitical conflicts, or unfavourable news about a certain firm or industry can all contribute to this gloomy feeling. A negative overhang can lead to a lengthy period of dropping prices, making it difficult for investors wanting to acquire or keep assets in such a market.
Risk overhang in insurance refers to situations where an insurer’s continued exposure to prior transactions limits its current activities. It is typically when an insurance company must decline lucrative prospects because it cannot accept any additional risk.
This risk overhang can be caused by various circumstances, including changes in policy terms and conditions, market conditions or even unforeseeable occurrences that may increase claims. Insurers must cautiously monitor risk overhang to maintain appropriate reserves and reinsurance coverage for future claims. Failure to do so may result in the insurance company’s financial instability and potential bankruptcy.
Some factors to examine while considering overhanging bonds include the issuer’s creditworthiness, current interest rates, maturity date, call provisions, bond rating, liquidity, market conditions, inflation expectations, and any unique features or covenants associated with the bond.
Overhang is calculated by dividing the total amount of outstanding stock by the number of present and future option offerings.
Related Terms
- Notional amount
- Negative convexity
- Jumbo pools
- Inverse floater
- Forward Swap
- Underwriting risk
- Reinvestment risk
- Final Maturity Date
- Bullet Bonds
- Constant prepayment rate
- Covenants
- Companion tranche
- Savings bond calculator
- Variable-Interest Bonds
- Warrant Bonds
- Notional amount
- Negative convexity
- Jumbo pools
- Inverse floater
- Forward Swap
- Underwriting risk
- Reinvestment risk
- Final Maturity Date
- Bullet Bonds
- Constant prepayment rate
- Covenants
- Companion tranche
- Savings bond calculator
- Variable-Interest Bonds
- Warrant Bonds
- Eurobonds
- Emerging Market Bonds
- Serial bonds
- Equivalent Taxable Yield
- Equivalent Bond Yield
- Performance bond
- Death-Backed Bonds
- Joint bond
- Obligation bond
- Bond year
- Bond swap
- Concession bonds
- Adjustable-rate mortgage
- Bondholder
- Yen bond
- Liberty bonds
- Premium bond
- Gold bond
- Reset bonds
- Refunded bond
- Additional bonds test
- Corporate bonds
- Coupon payments
- Authority bond
- Clean price
- Secured bonds
- Revenue bonds
- Perpetual bonds
- Municipal bonds
- Quote-Driven Market
- Debenture
- Fixed-rate bond
- Zero-coupon bond
- Convexity
- Compounding
- Parallel bonds
- Junk bonds
- Green bonds
- Average maturity
- Investment grade bonds
- Convertible Bonds
Most Popular Terms
Other Terms
- Options expiry
- Adjusted distributed income
- International securities exchanges
- Settlement currency
- Federal funds rate
- Active Tranche
- Convertible Securities
- Synthetic ETF
- Physical ETF
- Initial Public Offering
- Buyback
- Secondary Sharing
- Bookrunner
- Payment Date
- Secondary Market
- Margin Requirement
- Mark-to-market
- Pledged Asset
- Yield Pickup
- Subordinated Debt
- Trailing Stops
- Treasury Stock Method
- Stochastic Oscillator
- Basket Trade
- Contrarian Strategy
- Exchange Control
- Notional Value
- Relevant Cost
- Dow Theory
- Speculation
- Stub
- Trading Volume
- Going Long
- Pink sheet stocks
- Rand cost averaging
- Sustainable investment
- Stop-limit sell order
- Economic Bubble
- Ask Price
- Stock symbol
- Synthetic replication
- Bourse
- Beneficiary
- Witching Hour
- Widow and Orphan stock
- Public Float
- Closing Price
- Reverse stock splits
- Quiet period
- Prepayment risk
Know More about
Tools/Educational Resources
Markets Offered by POEMS
Read the Latest Market Journal
Navigating the vast world of unit trusts can be daunting. With nearly 2000 funds available...
Predicting Trend Reversals with Candlestick Patterns for Beginners
Candlestick patterns are used to predict the future direction of price movements as they contain...
In the diverse and complex world of investing, unit trusts stand out as a popular...
Back in Business: The Return of IPOs & Top Traded Counters in March 2024
Start trading on POEMS! Open a free account here! At a glance: Major indices continue...
Weekly Updates 15/4/24 – 19/4/24
This weekly update is designed to help you stay informed and relate economic and company...
From $50 to $100: Unveiling the Impact of Inflation
In recent years, inflation has become a hot topic, evoking strong emotions as the cost...
Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap
Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...
Weekly Updates 8/4/24 – 12/4/24
This weekly update is designed to help you stay informed and relate economic and...
