Chapter 2- Debt Securities 15-25 questions Flashcards
Most common issuers of debt securities
Corporations, Municipalities and Us government
Senior security
Bondholders are considered senior because they are settled before common stock
Funded debt
Corporate bond with 5+ years till maturity
Treasury bill or note or bond
Bills are less than a year while notes are 2 to 10 year maturities.
Bonds are 10 or more years
Interest on a bond
Called the coupon rate
The interest rate is calculated from the par value or face value
Usually 1000 per bond
Interest on a bond accrues daily
Final bond semiannual interest is paid when bond matures with original amount
How to read a bond sale:
5M ABC J&J 15 8s of ‘21
5 1,000 dollar bonds
ABC is the issuer
January 15 and July 15
8% annually
Principal repaid in 2021
Three basic types of bond maturity
Term- Principal of the whole issue repaid on a maturity date. Issuers will establish a sinking fund to retire bonds.
Serial- Principal to mature at intervals over a period of years.
Balloon- pays part of issue off before maturity and makes lump sum payment at term
Basic bond info
Name of issuer Interest rate and payment date Maturity date Call features Principal amount CUSIP Dated date (interest starts to accrue) Reference to bond indenture
Bearer bond (coupon)
Used to be sold normally
Would clip coupons and collect interest for the bond from the company
No longer issued, no name was on bond
Were not registered so the holder could do what they pleased with them
Deliver to paying agent to receive interest
Fully registered
Records the principal and interest the bond has
Transfer agent Issues a new one upon sale to another customer
Receive a physical certificate of the bond
Issued in 1000 denominations or multiples of 5000 up to 100,000
Book entry bonds
Do not receive certificates rather the trade confirmation acts as the certificate
Primary issues determining price of a bond
- Issuers financial stability
2. Overall trends in interest rates
Pricing bonds
Bonds are usually priced in 1/8ths increments
So a bid of 98 1/8 means a bond is worth 98.125
1 basis point is either .01% or .0001 of a dollar
80 Bp is .8% or $8 on a 1000 face value bond
Standard and Poors Ratings
Moody’s ratings
SP- give either a + for the top half of a category or - for bottom half
Ratings listed top to bottom:
AAA, AA, A, BBB, (non invest grade) BB, B, C, D
Moody’s- Adds numerical qualifiers to indicate where a bond is within a category such as 1, 2, 3
A1 and Baa1 to indicate high quality within two categories
Moody’s also provides ratings on short term munis designated MIG 1-4 and SG (speculative)
Aaa, Aa, A, Baa (below is speculative), Ba (could miss), B (missed 1 or more payments), Caa (no interest being paid), D (Default)
No rating does not reflect poorly, as most issues are too small to justify the expense
Mood Swings is a creative way to remember as Moody’s uses both upper case and lower case letters
Basis for bond ratings
Amount and comp of debt Stability of cash flow Ability to meet payment schedule Asset protection Management capability
Bank grade bonds
Rating of BBB or Baa and up
Ranking of safety in bonds
US gov Securities and series EE OR HH bonds
Gov agency though US gov does not officially back
Municipal issues (general obligation bonds protected by taxation while revenue bonds are backed by facility revenues)
Corporate debt usually ranked (Secured bonds, debentures, subordinated debentures, income bonds)
Debt service
Shcedule of interest and principal payments due on bond issue
Sinking fund
Facilitates the retirement of bonds
Can be used to call bonds, redeem bonds at maturity or buy back bonds
Makes bonds more marketable if low rated
Usually required by the trust indenture
Call feature
Redemption before maturity date either wholly or partial
Issuer notifies bondholders that it will call bonds at particular price
Partial calls are selected by lottery
Call premium
The difference between the call price and the par for the bond
If callable at 102, call premium is two points or $20 per bond
A point is $10
Term bonds vs serial bonds
Tender
Term bonds are called by random drawing
Serial bonds are usually called in inverse order of their maturities because longer maturities tend to have higher interest rates. This lowers the overall interest rate
If no call option is available, the bond is usually tendered