BONDS Flashcards
Bond types by interest payment
zero coupon bond floating rate registered junk foreign eurobonds
Describe zero Coupon rate bonds
do not pay interest
sell at very deep discount
return = cost - maturity value
no interest payments until maturity date
increase in value each year a they approach maturity
amort of int rate is tax-deductible even if the firm is not making int payments
Describe floating rate bonds
rate floats with changes in market rate
market price of the bond does not fluctuate heavily
STEADY MARKET VALUE
Reverse Floating bonds
floating rate that pays higher interest rate when others fall
lower interest rate when other rates rise
riskier than normal bonds
Describe registered bonds
registered in bondholder’s name
interest payments sent directly to owners
Describe junk bonds
very high risk premiums
result of leveraged buyouts
issued by large firms with financial trouble
appealing to investors who diversify the risk with other investment portfolio
Bonds classified by security provisions
mortgage bond collateral trust bond debentures subordinated debentures income bond
What is a mortgage bond?
secured by pledge of specific property
What is collateral trust bond?
secured by financial assets of the firm
What are debentures?
unsecured general obligation
only issued by firms with highest credit rating
high default risk
higher yield than other secured debts
What are subordinated debentures?
claims subordinated to other general creditors in the event of bankcruptcy
higher yield than unsecured debt
What is an income bond?
interest payments contingent on firm’s earnings
issued by restructuring firms
high risk
Eurobonds
bond payable in the borrower’s currency but sold outside the borrower’s country
not denominated in the local currency of the issuer
less expensive in financing costs bec of the absence of govt reg
