2.10 Other Types Of Bonds Flashcards
Income Bonds
Income bonds are a long-term debt security in which the principle is usually secured by a mortgage.
Offers a promise to pay if business is good. Issued by companies that are re-organizing. Only suitable for investors who can bear the high-risk.
Zero Coupon Bond
A bond that makes no periodic payments
Issued at a deep discount to their face value with the value being delivered at maturity
“Zero” meaning discount bond
Attractive to issuer because they do not cost anything in terms of interest payments until the bond matures
Attractive to Linder because they offer great leverage
Zero coupons lock in what?
Current interest rate for the life of the bond eliminating REINVESTMENT RISK
What’s the worst thing about zero coupon bonds?
They are typically offered in high-yield/junk bond markets by companies that have the highest risk of default
Callable Bonds
A bond where the issuer has the option to redeem them prior to the stated maturity date
Callable Bonds may have a sinking fund redemption. What does this mean?
The requirement the issuer is to set aside periodic payments aimed at reducing its debt
Funds are put in escrow at intervals stated in the indenture
Refunding
When issuers retire outstanding Bonds an issue new ones in their place
Refunding Bonds
When interest rates fall a company may issue newborns at a lower interest rate
These “new bonds” are known as refunding bonds
Defeased
The refunded bonds are said to be DEFEASED which means They are removed from the balance sheet as an outstanding loan
PUT Bonds
A feature allowing the investor to redeem the bonds and hard before the maturity date
Attractive to investors when rising interest rates force the price of bonds down
Investors can redeem the Bonds at par and reinvest the principal at the higher interest rates
Most bonds are quoted at a “clean price” What does this mean?
The quoted price does not include interest
Most bonds are traded at a “dirty price”What does this mean?
This includes any interest that has accrued on the bond from the date interest was last paid, until the day before the settlement date
Settlement date
The date that buyers are expected to pay for the securities they purchased and sellers are expected to deliver the securities they sold
For most securities settlement is two business days after the trade date or T + 2
Regular way settlement
Two business days after the trade date or T+2
Settlement for corporate bonds
T+2
