Chapter 24 Flashcards
what kind of offering memorandum must be produced to describe details of public bond offering?
prospectus
what must the prospectus include?
indenture
what is an indenture?
formal contract between bond issuer and trust company
what is the trust company?
represents the bondholders and makes sure that the terms of the indenture are enforced
in the case of default, who watches out for bondholders interests?
trust company
does the face value of bonds always correspond to money raised?
no because of underwriting fees and the possibility that the bond might not actually sell for its face value when offered for initial sale
what is a original issue discount (OID)?
When coupon bond is issued at a discount
what are bearer bonds?
like currency: whoever physically holds the bond certificate owns it and must provide proof of ownership to receive coupon
almost all bonds that are issued today are called…
registered bonds
how do registered bonds work?
issuer maintains list of all holders and brokers keep issuers informed of any changes in ownership
what are the four types of corporate debt usually issued?
notes, debentures, mortgage bonds, and asset backed bonds
what do debentures and notes have in common?
they are unsecured debt, meaning in bankruotcy meaning they have claim only to assets that are not pledged as collateral on other debt
how long are notes maturities usually?
less than 10 years
what do asset backed bonds and mortgage bonds have in common?
they are secured debt: specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy
what is a difference between mortgage bonds and asset backed bonds?
mortage bonds are secured by real property, where as asset backed bonds can be secured by any kind of asset
what is a subordinated debenture?
when a firm conducts subsequent debenture issue that has lower priority than its outstanding debt
holders of subordinated debentures, in terms of seniority in bankruptcy..
unsecured assets will pay off all senior debt before subordinated debentures get to touch it
what are the four categories of international bonds?
domestic bonds, foreign bonds, eurobonds, and global bonds
what are domestic bonds?
issued by a local entity and traded in local market, but purchased by foreigners (denominated in local currency)
what are foreign bonds?
issued by foreign company into local market intended for local investors and denominated in the foreign currency
what are yankee bonds?
foreign bonds in the US
what are eurobonds?
international bonds not denominated in currency of the country they’ve been issued (US bond in Japan denominated in Dollars for example, but can be in any currency like euro). trading of these bonds not subject to any particular country’s regulations
what are global bonds?
combine features of domestic, foreign and eurobonds and offered for sale in several markets at once
how do you mitigate currency risk in yields?
the same bonds (global bonds) issued in different countries have different yields
what is an advantage of private debt?
avoid the cost of registration but disadvantage of being illiquid
what are the two segments of private debt markets?
term loans and private placements
what is a term loan?
bank loan that lasts for a specific term
what is a syndicated bank loan?
single loan funded by group of banks rather than just one
what is a revolving line of credit?
credit commitment for a specific time period up to some limit which a company can use as needed
what is a private placement?
Bond issue that doesn’t trade publically but sold to small group of investors. doesn’t need to be registered. less costly to issue.
what is SEC rule 144A?
increased liquidity of certain privately placed debt (can be traded by large financial institutions). created to help foreign corporations get into US markets
what is sovereign debt?
issued by national governments.
what are the four kind of securities the treasury issues?
bills, notes, bonds, inflation indexed
Treasury bill is what type and maturity?
discount; 4, 13, 26 weeks
treasury note is what type and maturity?
semiannual coupon: 2, 3, 5 and 10 years
treasury bonds is what type and maturity?
coupon: 20 and 30 years
inflation indexed treasury is what type and maturity?
coupon: 5, 10 and 20 years
what are long bonds?
treasury bonds with 30 year maturities
for TIPS, the coupon rate is fixed but…
the dollar coupon varies because semiannual coupon payments are fixed rate of the inflation adjusted principal
treasury securities are initially sold how?
by auction
how many and what kind of bids are allowed at treasury auctions?
competitive bids and noncompetitive bids
what is a noncompetitive bid?
usually individuals who just submit the amount they want and are guaranteed to have orders filled
what is a competitive bid (treasuries)?
submit sealed bids in terms of yields and the amount of bonds they are willing to buy. treasury then accepts lowest yield (highest price) bid up to the amount required to fund the deal.
what is the stop and out yield?
highest yield accepted
within a treasury auction, after all competitive bidders have finished and the treasury has selected their owners what happens to yield?
all successful bidders (including non-competitive bidders) receive stop-out yield
is income from treasury securities taxed?
taxed at federal level but not state or local
what are STRIPS?
separate trading of registered interest and principal securities. Also Zero Coupon Bonds. Not issued by treasury itself. issued by investors or IBD’s by buying T-notes or T-Bonds and reselling each coupon and principal payment separately
what are municipal bonds?
issued by state and local governments. most pay semiannual coupons
what are serial bonds?
municipal bonds which have one issue containing different maturiy dates.
the coupons on municipal bonds can be either..
fixed or floating
what are revenue bonds?
muni that pledges revenues generated by projects initially financed by bond issue
Bonds backed by the full faith and credit of a local government are called?
general obligation bonds
what are double barreled bonds?
sometimes local governments also promise to pay general obligation bond with revenue source, hence the “double”
as a consequence of the economic downturn, what happened to state and local bonds?
2008 136 municipal bonds defaulted
what is an asset backed security?
security made up of other financial securities or that their cash from come from cash flows of underlying financial securities behind it
what is asset securitization?
process of creating asset backed security; packing portfolio of securities and issuing ABS
what is a mortgage backed security?
asset backed security backed by hoe mortgages
in the case of GNMA issued MBS, what does the US do?
provides explicit guarantee to investors against default
what is a risk inherent in government guaranteed loans?
repayment risk
when banks securitize asset backed and other fixed income securities, what is the new asset backed security allowed?
collateralized debt obligation (CDO)
what are covenants?
restrictive clauses a bond contract has that limit issuers from taking actions that undercut ability to pay back bonds
how could you screw debt holders and held equity holders if there’s no covenants?
issue bonds, liquidate assets an pay proceeds to dividends and file bankruptcy
what are some things covenants can restrict?
managements ability to pay dividends, other debt issues,
if the issuer fails to live up to any covenant, what happens?
bond goes into default
what are callable bonds?
provision that allows issuer to repurchase bonds at predetermined price
explain the call feature in detail
allows issuer of bond the right to retire all outstanding bonds on or after a date (call date) for the call price
the price of a nominal bond, compared with a callable bond is always
higher (callable bond is lower)
what is the yield to call?
annual yield of callable bond assuming that bond is called at the earliest opportunity
what is a sinking fund?
company makes regular payments into a sinking fund administered by trustee over the life of bond and used to repurchase bonds. this lets company reduce amount of outstanding debt without affecting cash flows of remaining bonds
a convertible bond can be thought of as a regular bond plus
a special type of call option called a warrant
if the sinking fund payments are not sufficient to retire the entire issue than what occurs?
company must make a balloon payment
what is a warrant?
call option written by the company itself on new stock (regular call option is existing stock)
on the maturity date of the bond, the strike price of an embedded warrant is equal to….
face value of bond divided by conversation ratio (conversion price)
