Chapter 3 - Types of Bonds Flashcards
Convertible Bonds
A corporate bond that can be converted at the investor’s choice into a fixed number of common shares of the company
Parity price
Market value at which an investor is indifferent toward owning a convertible bond or converting into the underlying common stock
MBS
Mortgage backed security
Mortgage backed security
Pools of mortgages that are turned into bonds, helping to create more liquidity in the mortgage market
Collateralized mortgage obligations
Mortgage backed securities that are structured by broker-dealers and divided into tranches, each varying by expected maturity, credit quality, and exposure to investment risks
General obligation (GO Bonds)
Municipal bonds issued to finance a non-revenue producing facility (public park, public school, or public library) and backed by the taxing power of the issuing municipality
Revenue bonds
Municipal bonds issued for and backed by a revenue-producing facility (toll road, an airport, or water treatment facility)
Money market securities
Very safe and liquid debt securities with maturities of one year or less
What are some examples of money market securities?
Treasury bills, negotiable certificates of deposit, and commercial paper
The term corporate bonds usually applies too _________ debt instruments with maturities of at least ______ years
Longer-term, 10
Notes
Medium term maturity instruments
Commercial paper
Used for corporate instruments with a maturity of no more than 270 days
Vast majority of trading volume in corporate bonds takes place in the ______________ market place
Over the counter
Interest paid on corporate bonds is fully taxable as ordinary income at the ________ levels
Federal, state, and local levels
Trust Indenture Act of 1939
Requires that corporate debt issues of more than 50 million include a written agreement (trust indenture)
Trust indenture
Written agreement between the issuer and an independent trustee acting on behalf of the bondholders
The indenture includes a number of __________ or promises by the issuer, that are designed to protect the interests of the bondholders
Covenants
Who is usually the trustee?
Large bank
What is the trustee legally empowered to do?
Act in the best interest of the bondholders to ensure the issuer meets its obligations
In the event that a bond issuer defaults, the appointed trustee may be able to seize the __________ and ________
Issuer’s assets, and sell them to recoup the bondholders investment
Secured corporate debt
Backed by the corporate collateral
Investors have rights to the collateral if ________
If the issuer defaults on principal and interest payments
Mortgage bonds
Corporate bonds that are secured by real estate holdings or other real property (can take your house)
Collateral trust bonds
Secured by a financial asset owned by the corporation, such as stocks, bonds, or other securities (can take your stocks)
Equipment trust bligations
Debt instruments that are secured by equipment or physical assets such as airplanes, trucks, and trains
What is another way to say unsecured corporate debt?
Debenture bonds
Unsecured corporate debt vs Secured debt
Pay more interest than secured debt because it is not backed by a specific asset
Some unsecured debt may be contractually identified as senior to other unsecured debt which ______
Gives it higher priority in a corporate liquidation
More junior debt is called _____
Subordinate debt
The holders of subordinate debt have a _________ in case of a bankruptcy filing and because of this subordinated debt pays more interest to investors
Lower priority
What is the liquidation priority of a bank? From first to last
Secured bondholders, unsecured bondholders and general creditors, subordinated debt and convertible bonds, preferred stockholders, common stockholders
Why are secured bondholders paid first if a corporation declares bankruptcy?
Bc the bond is backed by or secured by tangible property
As the investment goes from least risky to riskiest, the return goes from ____ to _____
Lowest expected to highest expected
Convertible bonds yield less interest than __________ bonds from the same issuer because of the flexibility that comes along with them
Non-convertible bonds
Convertible securities tend to be offered by issuers as a means to achieve _________ for borrowing
Lower fixed costs
Through the issuance of convertible debt rather than equity, issuers avoid ____________ if their common sares
Immediate dilution
From an investor’s prospective, though convertible bonds are a safer investment than common stock, they can _____________
Provide stock like returns
Convertible bonds are ________ than stocks and their value can only fall to a price where the yield would be equal to that of a non-convertible bond with the same terms
Less volatile
In a period of stable interest rates, the price of the convertible bond will be ______ than that of other types of debt. This is because the convertible bond will fluctuate in price with the underlying stock.
More volatile
Conversion price
Stated price at which the bondholder is able to convert to shares of common stock
Conversion ratio
Number of common shares that the bondholder will receive upon conversion
Equation for conversion ratio
Par value/conversion price
Conversion parity is also known as _____
Parity price
Eurodollar bonds
Bonds issued outside the united states but denominated in US dollars
Eurodollar bonds are __________ outside the US and are not registered with the SEC
Issued and trade
