3 - Bonds Payable & Other Concepts Flashcards
Long-term debt instruments similar to notes & loans but are usually offered to the public and sold to many investors
Bonds
Any contract that represents right to receive cash from issuer to the holder.
Debt instrument
A debt instrument represents what kind of relationship between entities?
Debtor-creditor relationship
Contractual arrangement between issuer and bondholders that contains restrictive covenants to prevent issue from taking actions contrary to interests of bondholders.
Bond indenture
Appointed to ensure the compliance of restrictive covenants in the bond indenture
Trustee (often a bank)
Bond Indenture specifications:
a. Rights & duties of bondholders and issuer
b. Restrictions and requirements on the issuer
c. Interest rate, payment dates, and maturity dates
Rights & duties of bondholders and issuer have the following:
- Call provision
- Redemption rights
Issuer’s right to call the bonds before maturity
Call provision
Holder’s right to redeem the bonds
Redemption rights
Restrictions and requirements on the issuer has the following:
- Sinking funds
- Financial rations
- Restriction on dividends available to the shareholders
- Restriction on incurrence of additional obligations
- Appointment of independent trustee
- Authorized amount
Issued to bondholder representing amount of bonds that has been purchased
Bond certificate
Bonds are usually issued in small denominations, why?
To increase affordability of bonds
Bonds can be issued in several ways:
- Underwriting
- Auction
- Direct placement
Agrees on the price, pays issuer, and resells at higher price
Underwriter
Mature on a single date
Term bonds
Principal matures in installments
Serial bonds
Have more than one maturity and permits investors to choose maturity dates that meet their needs
Extendible and Retractable bonds
Give holders right to extend
Extendible bonds
Give holders right to shorten
Retractable bonds
Issued in name of holder and interests are paid directly to them. When bond is sold, new certificate is issued.
Registered bonds
Freely transferred and have a detachable coupon
Coupon or Bearer bonds
Do not pay periodic interests, both principal & compounded interests are due @ maturity date
Zero-coupon bonds/
Strip bonds/
Deep discount bonds
Pay interest only if issuer earns profit
Income bonds
Participate in excess earnings of issuer
Participating bonds
Pay interest indexed to measure of general purchasing power
Indexed bonds
Principal and interest are adjusted in response to inflation providing protection to bondholder from inflation
Inflation-linked bonds
Secured by real property
Mortgage bonds
Secured by issuer securities held by a trustee
Collateral trust bonds
Collateralized by a pool of assets
Asset-backed bonds
Have higher yield but lower priority during liquidation
Subordinate bonds
Not secured by any collateral
Debenture bonds
High risk, high-yield bonds
Junk bonds
Bonds issuer can redeem prior to maturity date
Callable bonds
Holder can exchange for issuer’s shares of stocks
Convertible bonds
Issued by a corporation
Corporate bonds
Issued by companies with high credit rating
Investment grade
Issued by companies with low credit rating
Non-investment grade
Issued by a government and have low financial risk since they are free from default
Government bonds or Treasury bonds
Issued by a foreign entity in a domestic market
International bonds
Denominated in a currency other than currency of the market where they are offered
Eurobonds
Denominated in the currency of domestic market in which they are offered
Foreign bonds
Yen-denominated in Japan
Samurai bond
Australian denominated issued in Australia
Kangaroo/Matilda bonds
Canadian - Canada
Maple bonds
Euro - Spain
Matador bonds
British - British market
Bulldog bonds
US - US market
Yankee bonds
Bonds issued in several countries at the same time
Global bonds
Bonds are accounted for the same way as notes and loans payable but bonds are:
- long-term
- bears interest
- issued @ premium/discount
- transaction cost
