Ch. 7 Debt Securities Flashcards
Corporate and US Govt Loans
Most ______ are safer than stocks
Bonds
What are Bondholders considered?
Bondholders are considered creditors. They lend $$$ to an institution for a fixed period of time and receive interest for doing so.
Why are bonds attractive to issuers?
Allows the issuer to borrow $$$ on its terms (w/ its chosen maturity date, scheduled interest payments, interest rate, etc.)
The issuer cannot set it’s own terms by borrowing from a lending institution.
What is a Bond Maturity Date?
The date issuers pay bondholder back for the loan they .
Par Value
Stated at issuance
What is Par Value (Bonds)
The face value or principal of the bond
The Par Value for corporate bonds is $1,000 unless otherwise stated
Regardless of what the investor paid at purchase, they will receive the par value plus any interest due at the maturity date
How are Bond Prices Quoted?
Bond prices are quoted as a percentage of par value, often w/o the % sign.
A bond trading at 100 is trading at 100% of par or $1,000.
A bond trading a 86 is trading at 86% of par or $860
How are Corporate Bonds typically quoted?
Corporate bonds are typically quoted in increments of 1/8%
So, a corporate bond quoted at 99 3/8 would be trading at $993.75
How are Government Bonds typically quoted?
Government Bonds are typically quoted in increments of 1/32%
What is the Coupon Rate
Coupon Rates is the interest an investor would receive for providing loans to the issuer
Tells the investor how much annual interest they will receive
Bonds w/ a set coupon rate are considered what kind of security?
Fixed Income Security
How is the coupon rate expressed?
As a percentage of Par Value
How often to Bonds pay interest?
Semi-Annually
What is a Bond Indenture
Deed of trust
Resolution
The legal agreement between the issuer and its bondholders
Contains
1. Maturity Date
2. Par Value
3. Coupon Rate (Nominal Yield) and interest payment dates
4. Any collateral securing the bond
5. Any call or conversion features
6. Includes a Trustee
What is a Trustee (re: a bond indenture)
Charged w/ making sure the issuer does the right thing for the bondholders.
An organization that administers a bond issue for an institution
Ensures that the bond issuer meets all the terms and conditions associated w/ the borrowing
What is Collateral?
assets that the issuer owns
What are secured Bonds?
Bonds backed by collateral adn involve a pledge from the issuer that a specific asset will be sold to pay off the outstanding debt in the event of default
Lower yield than unsecured bonds due to lower risk
Four types of secured bonds
- Mortgage Bonds
- Equipment Trusts
- Collateral Trusts
- Guaranteed Bonds
What are mortgage bonds?
Secured Bond backed by property that the issuer owns
May be OPEN END or CLOSE END
What is an open end mortgage Bond?
a secured bond backed by property that the issuer owns where the issuer MAY BORROW MORE MONEY using the same property as collateral
What is a CLOSED END MORTGAGE BOND?
A secured bond backed by property that the issuer owns where the issuer MAY NOT BORROW MORE MONEY using the same property as collateral.
What is an Equipment Trust?
Secured bond mainly issued by transportation companies. Backed by equipment owned
Trustee holds the title
What is a Collateral Trust?
Secured Debt.
A collateral trust is a bond backed by financial assets of other issuers that the issuer owns.
Trustee holds the assets and sells them to pay off the bonds in the event of default.
What is a Guaranteed Bond?
Secured debt. Backed by a firm other than the original issuer (parent company). If the issuer defaults, the parent company pays of the interest and / or principal
What is an Unsecured Bond?
Bonds not backed by assets, but only backed by the god faith and credit of the issuer