Corporate bonds Flashcards
Six examples of institutional investors
- mutual funds
- hedge funds
- pension funds
- banks and credit unions
- insurance companies
- investment advisors
When would a corporation issue commercial paper?
For short-term funds
What would a corporation issue for short-term funds/
Commercial paper
What type of interest paying coupon is commerical paper?
zero coupon
What is the usual par value of commerical paper?
100,000 or more
What is the mamximum maturity days for commercial paper?
270 days
When are corporate debt securities exempt from SEC registration?
When they are issued with 270 days or less to maturity
What does it mean when a corporate debt is “funded”?
When a corporate issuer has access to their borrowed funds for an extended period
What is a debenture?
A long term, unsecured corporate bond
What is the riskiness relationship between debentrues and secured bonds?
Debtentures are more risky
What makes debentures risky?
There is no valuable asset the bondholders can access should the corporation go bankrupt
What does it mean when bond is naked?
When it is unsecured and not backed by any pledged collateral
What makes something a guaranteed bond?
Any bond with backing from a third party to pay interest and/or prinicipal in case of default
What is an example of when a third party backs a guaranteed bond?
When a subsidiary utilizes its parent company as a “co-signer”
What are two typical third parties?
- parent companies
- insurance companies
Are guaranteed bonds secured or unsecured and why?
Unsecured because there is no collateral associated
What two options do corporate bondholders suing for bankruptcy have?
- force issuer to liquidate company
- Allow company to “restructure” their debt
Are income bonds risky and why?
Yes because they are risky because most times after bankruptcy a company does not recover
When would a corporation issue an income bond?
When the bondholders believe the issuer can restructure and become profitable again
When/how often do income bonds pay interest?
Only when the issuer meets the earnings test
What happens to initial bonds before the company issues new income bonds?
They are destroyed
What type (secured/unsecured) are mortage bonds?
Secured
Why would a corporation issue mortgage bonds?
To lower their overall cost of borrowing money.
Why does issuing mortgage bonds lower the overall cost of them borrowing money?
Because they are not as risky and therefore don’t need to give as high of yields
Which are more risky, second mortage bond investors or first and why?
Second mortgage bond holders are more risky because they are paid second after liquidation
What are equipment trust certificates?
They are a type of secured bond backed by the liquidation of its equipment
What type of company commonly issues utility bonds?
Utility companies
In what entry format are ETCs issued?
Serial format
What is required/how much money to fully back an offering?
Collateral must be worth at least the combined value of future interest payments and principal payments
Why are Equipment Trust Certificates issued in serial format?
So they can synchronize debt repayment with the equipment’s expected decline in value
What are collateral trust certificates?
Bonds secured by marketable assets owned by corporation
What are two types of marketable assets trust certificates can be backed by?
- Investment portfolio
- Subsidiary of their company
What two things determine the number of stock shares received if a bond is converted?
- Conversion ratio
- Conversion price
What does stock parity price describe?
The equivalent stock cost if a bond is bought and converted
What does parity pricing help determine?
When conversion is profitable
What is the Stock parity price formula?
bond market price / conversion ratio
Where do corporate bonds almost exclusively trade?
Almost exclusively in over the counter markets
What two investment strategies do corporate bond holders use?
- Buy low and sell high
- Simply buy and hold to maturity
What two things do market prices depend on for corporate bonds, but what is ultimate?
- Depend on interest rates
- Demand for a corporate bond is ultimate
What should you look for when identifying a corporate bond quote?
A big number followed by a fraction
What fraction are corporate bonds quoted in?
Eighths
Method to turn a fractional corporate bond into a price?
Fraction - boot - scoot
What are the three steps to fraction-boot-scoot
- Calculate the fraction
- Boot the decimal back to the big number
- Scoot the decimal once over to the right
What are bond points?
A way to refer to percentage of par, Every bond point is worth 10 dollars
What is the ‘s’ in corporate bond quotes?
The coupon interest rate
What is the M’ in corporate bond quotes?
the maturity year
What does the M represent in corporate bond quotes?
1000 dollar par
What are Certificates of Deposit?
they are similar to bonds but only issued by banks
What are three types of banking products?
- Certificats of deposit
- Jumbo negotiable CDs
- Banker’s acceptances
Where are Regular CDs only bought?
THrough the issuing bank
What are Jumbo CDs also called?
Negotiable CDs
Where are Jumbo CDs traded?
Secondary market
What is the minimum denomination for jumbo cds?
hundred thousand dollars
What is the only long term corporate debt security?
Debenture
Who determines the credit rating of a guaranteed bond?
The parent company
Does FINRA rate bonds?
no
What is a common form of collateral for a CTC?
Subsidiary
A debenture is a ___-term, ___- secured corporate bond
Long term- unsecured
What type of company is most likely to issue a mortgage bond?
Utility Companies
Which type of corporate bond is NOT issued in term format?
ETCs
What does stock parity price tell you?
Tells you whether the stock trading value is profitable to convert the bond or not
What does the bond parity price tell you?
Tells you whether the bond price is valuable to buy and convert
Conversion cost per share formula
bond price/conversion ratio
Stock parity price formula
Bond market price/conversion ratio
Bond parity price formula
stock price x conversion ratio
When are mezzanine debt holders paid out in event of liquidation?
after senior debt holders but before stockholders
Who usually issues mezanine debt?
Smaller corporations and start ups
What size yield do mezzanine debts have?
High yields
What does PIK stand for?
Payment in kind
How do companies pay PIK interest instead of semi-anually in cash?
They add “payable interest” to the loan principle, to the par.
What term debt is mezzanine debt?
Long-term corporate debt
What three additional features may mezzanine debt offer?
- PIK interest
- Warrants
- Conversion features
When is PIK interest reedeemable?
Only at redemption or maturity?
Who has to approve convetible bond issuance?
Majority approval from common stockholders
wHat’s another name for junior unsecured creditors?
Subordinated debenture holders
What form are treasury bills quoted in?
Yield form
What form are general obligation bonds quoted in?
Yield formWhat
form are treasury bonds quoted in?
32nds
Why is a banker’s acceptance a win win?
Because the organization selling the check can get access to their liquidity early and the organization buying the check can get
Why are banker’s acceptances considered money markets?
Because they are short term in nature
What are the SEC registration time exemptions for bankers acceptances?
issued with 270 days or less to maturity
What term are jumbo CDs? When do they mature?
Short term 1 year or less
Define reserve currency
Currency commonly utilized by the world’s central banks and largest financial institutions
What is the central bank of the US?
Federal Reserve
What is a eurobond?
A debt security that pays interest and principal in. adenomination other than the currency of the country it was issued in
What are the two ways currency risk occurs?
- Converting into a strong currency
- Converting out of. aweak currency
What two quotes are provided for a currency conversion?
- The spot price
- The forward price
What is the spot price?
Current/immediate exchange rate
What is the forward price?
An exchange rate agreed upon today but for a conversion in the future
What method do investors use to protect themselves from currency risk?
Forward Price
What 4 types of orgs issue eurobonds?
- US corporation
- US municipalities
- Foreign Corp
- Foreign gov
WHat is a eurodollar bond?
Bond that pays interest and principal in US dollars but is issued outside US
Why are eurodollar bonds enticing for american issuers?
Because they face no currency risk but gain access to funding from foreign investors
What are eurodollar bonds exempt from?
SEC registration
Difference between eurobond and eurodollar bond
Eurobond pays in a denomination other than the currency of the country it was issued in
Eurodollar bond issued outside of the US that pays interest and principal in US dollars
What is a eurodollar deposit?
US Dollar held in. an account outside of the US
Who does not participate in the
