4.0 Types of Securities Flashcards
Indenture (Bonds)
The terms of bond agreements
- Can property purchased with bonds be Sold?
- Usually states that property bought with bonds can’t be pledged on another loan
Underwriting (by Investment Banker)
- An INSURANCE function when he buys securities and resells them
Risk of Price Fluctuations during distribution period borne entirely by Investment banker
Profit earned = underwriting spread. Difference purchase and resale price
Bond Pro/Con
pro: T,C
Con: LLII
Pro:
- Tax Deductible
- basic Control not shared with Debtholders
Con:
- Legal obligation: (Can force Insolvency), Raises Risk>S-holders demand higher capitalization rates>Decline in stock prices
- Limited: Debt Financing (Debt/Equity) limit decided by community. After which>too expensive
- Interest rates may fall and might be unable to refinance
- Indenture may call mgt to maintain specific ratios
Call Provision - Bond
Bond Sinking Fund
Issuer may Call the debt in (Redeem).
This is undesirable to Bond Holder
A fund established to retire Bond Debt
Term Bond v
Serial Bond
Matures at end
Serial Bond matures at stated amts over time
Variable Rate Bonds
Interest based on market
Zero Coupon Bond (Deep Discount Bond)
No interest rate, no pmts. Interest is the Discount
Commodity Backed Bond
Payable at rates tied to a commodity (ie Gold)
Convertible Bonds
Convertible into Equity
Types of Bond by Security
Mortgage - Backed by assets (usually real estate)
Debentures - By full faith and credit (no asset)
Equipment Trust - Equipment
Registered Bonds v
Bearer
Named owner receives interest and principal
Bearer: Holder receives
Junior Securities
Subordinated Debentures and Second Mortgage Bonds (Claims inferior to Senior Bonds)
Income Bonds
Pay interest only if issuer Earns the Interest
Revenue Bonds
Government Bonds payable from specific Revenue Sources
Bond Ratings
AAA - Investment Grade
BB or lower - Junk Bond
