Ch 18: Gov. Bonds Flashcards
Corporate Bond
is issued by a corporation, represents a promise to pay bondholders the principle at a future maturity date, along with periodic payments of interest
Trade on NYSE, mostly owned by pension funds and life insurance companies
Bond Trading
An active secondary market exists with a substantial volume of bond trading, satisfying most of the liquidity needs of investors
Plain Vanilla Bonds (or “bullet” bonds)
these bonds are issued with a standard, relatively simple set of features on maturity, coupon and indenture provisions
Debentures
are unsecured bonds issued by a large firm
Mortgage bonds :
are debt secured with a property lien
Collateral trust bonds, commonly issued by holding companies,
are debt secured with financial collateral such as stocks and bonds.
Equipment trust certificates
are debt issued by a trust with income from a lease contract for heavy industrial equipment (commonly used by rail roads, airlines and other transportation firms).
Bond indenture
a formal written agreement between the corporation and the bondholders
Term bonds:
Serial Bonds:
are issued with a single maturity date
are issued with a regular sequence of maturity dates.
Senior Debentures
Subordinated Debentures
are the bonds paid first in case of default.
are paid after senior debentures.
Bond seniority may be protected by a negative pledge clause, prohibiting a new debt issue that would have seniority over existing bonds.
Most corporate bonds are callable bonds
A call provision gives the issuer the option to buy back the bond at a specified call price, which is often equal to par value (callable at par) although it may be higher.
Common restrictions to call privilege:
- a deferred call provision provides a call protection period, usually 5 years after its issue date
- a call premium, included in the call price, usually equals to one year coupon payment
Bond refunding
When interest rates fall, bond prices increase. The corporation can “call-in” the existing bonds, then issue new bonds with a lower coupon
Which bond sells at a higher price: callable or non-callable bond, other things equal?
Non Callable bonds sell at higher prices below 20% Yield to Maturity
Retractable bond:
Extendible bond:
a retractable bond gives bondholder the option to redeem the bond early, when the bond’s coupon rate is below current market yields
an extendible bond gives bondholder the option to retain the bond for additional period beyond maturity, when coupon exceeds current rates.
A bond with a put provision
can be sold back to the issuer at a pre-specified price (normally set at par value) on any of a sequence of pre-specified ‘put’ dates. Putable bonds can be retractable or extendible.
Convertible bonds can be exchanged for
common stocks according to a pre-specified conversion ratio
A convertible bond consists of which two assets:
- a bond
2. a warrant (which is a call option issued by the firm)
Valuing a convertible requires assumptions:
1) the underlying stock volatility, and
2) the credit spread for the fixed income portion that takes into account the firm’s credit profile and the ranking of the convertible within the capital structure.
A convertible bond is:
out-of - money if:
in-the-money:
out-of-money if conversion value < straight bond value (when the convertible is issued),
in-the money if conversion value > straight bond value.
Convertible bonds allow debt financing with lower borrowing costs.
(BLANK PAGE) This is a true statement
Sinking Fund Provision
requires the firm to make periodic payments into a trustee-managed account, to ensure the repayment of principle.
provides security to bondholders for the repayment of principle.
Protective Covenants Are:
are restrictions designed to protect bondholders.
Negative covenants:
- The firm cannot pay dividends in excess of what is allowed by some formula based on the firm’s earnings.
- The firm cannot pledge any assets to other lenders
- The firm cannot merge with other firms
- The firm cannot issue additional long term debt
Positive Covenants
- The firm must maintain collateral in good condition
- Working capital must be above some specified level
- The firm must provide financial statements to lenders
______ bonds are secured by financial assets of the issuing company.
Collateral trust
Names two negative protective covenants that can be found in a bond indenture?
I) Bonds with senior status cannot be issued while this bond issue is outstanding
II)The issuer is prohibited from guaranteeing debt of another firm
