Bonds Flashcards
Bonds
Bonds are the principle form of long term debt financing for corporations and governmental bodies
- bond is a formal contract to pay an amount of money to the holder at a certain date, plus in most cases a series of cash interest payments based on a specified percentage of the face amount at specified intervals.
With regards to bonds , all terms of agreements are stated in document called what?
indenture.
what indenture include?
- the indenture includes matters such as whether the issuer can sell property purchased with bond proceeds and extent of maintenance the issuer must provide.
- the indenture usually stated that purchased property must be insured and cannot be pledged as security for another loan
- The bond indenture also includes the details of the rights of ownership as well as the rights of the bondholder to receive interest payments and principle payments in the future.
A bond indenture / w
A bond indenture is a legal document or contract between the bond issuer and the bondholder that records the obligations of the bond issuer and benefits owed to the bondholder. The bond indenture also includes the details of the rights of ownership as well as the rights of the bondholder to receive interest payments and principle payments in the future.
Bringing a bond issue to market requires extensive legal and accounting work. the results of that?
this process is rarely worthwhile for bonds with maturities of less than 10 years
What Is Underwriting? / W
Underwriting is the process through which an individual or institution takes on financial risk for a FEE. #This risk most typically involves loans, insurance, or investments. The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium
when investment banker purchases an (issue of securities) and then resells them, Name that FUNCTION?
Underwriting or insurance function , the risk of price fluctuations during the distribution period is borne entirely by the investment banker
What is the underwriting spread ?
the profit earned or the difference between the profit earned and resale prices of securities
With Regarding to bonds and in general to compensate for increased risk the investor demand what ?
the longer the term of bond, the higher will be the return (yield) demanded by investors to compensate for increased risk .
Advantages to bonds to the issuer
1- interest paid on debt is tax deductible
2- Basic control of the firm is not shared with debtholders
disadvantage of bonds to the issuer
1-unlike returns on equity investments, the payment of interest and principal on debt is legal obligation , if cash flow is insufficient to serve debt, the firm could become insolvent.
2- The legal requirements to pay debt raises a firm’s risk level
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Debt Covenants
are restriction or protective clauses that are imposed on a borrower by the creditor in a formal debt agreements or an indenture
Examples of debt covenants
1- limitation on issuing long term or short term debt
2- limitation on dividend payments
3-Maintaining certain financial ratios
4-Maintaining specific collateral that backs the debt
the more restrictive the debt covenant, the lower the risk that borrower will not be able to repay its debt. [continue..]
the less risky the investment for creditors, the lower the interest rate on the debt (since the risk premier is lower)
what if the debtor breaches the debt covenant ?
the debt becomes due immediately
