2.9 Types Of Unsecured Bonds

Question 1

Unsecured Bonds

Answer 1

Bonds that are secured by only a corporations promise to make the payment nothing else

Most corporate bonds are unsecured

Question 2

Debentures

Answer 2

Bonds not secured by a physical asset or collateral but simply by the “full faith and credit” of the issuer.

An Indenture or written agreement promises that the issuer will pay semi annual interest payments and par value at maturity.

Question 3

Income Bond

Answer 3

A bond that offers they promised to pay if business is good.

Issued by companies that are re-organizing.

Only suitable for investors who can pay bear the high risk

Question 4

Priority in liquidation

Answer 4

1. Secured debt holders
2. Administrative expenses
3. Unpaid employee wages
4. Unpaid contributions to employee benefit plans
5. Customer deposits
6. Taxes
7. Unsecured debt holders(debentures)
8. Preferred stockholders
9. Common stockholders

Question 5

Junk Bonds

Answer 5

Non-investment grade Bonds

BB+ credit rating or lower

Also know as High Yield Bonds due to their higher yields that are used to compensate for their lower credit rating.

Question 6

Convertible Bonds

Answer 6

Bonds that can be converted into shares of preferred or common stock at a fixed conversion ratio

Question 7

Convertible debentures

Answer 7

They have a lower repayment status than other debt Securities

They raise equity capital now at prices that reflect expected future performance

They raise equity capital without seriously deflating the current price of stock the way a new stock issued would

Question 8

Conversion Ratio

Answer 8

The number of shares of stock to the barn holder will receive a pond converting a bond

Question 9

Conversion Ratio Equation

Answer 9

Conversion Ratio = par value of the convertible pond / conversion price

Question 10

Conversion value

Answer 10

The Fonz value if it were to be converted at the present moment

Conversion ratio x Current market price of the stock

Question 11

Can convertible bonds be CALLED?

Answer 11

Yes

The company will call a bond within the callable. Soon after the conversion value exceeds the call price

Investors will have 30 days notice to redeem their bonds at the redemption price, which might be at par or at call price that’s higher than par