Corporate Bonds Flashcards
Are coupons and yields on corporate bonds higher than that on gilts?
As gilts are loans to governments, so corporate bonds are loans to companies and since the risk of default is greater with a company, the risk is higher and so the return demanded in the form of the coupon is generally higher.
Generally speaking, the larger the company, the lower the risk of default and therefore the higher the credit rating of the loan stock.
How do issues of corporate bonds benefit a company?
A company may choose to issue corporate bonds to raise capital as an alternative to taking a loan with a bank. This method of raising capital is comparatively cheaper and gives access to a range of lender markets. It may also be the case that a bank loan cannot be secured over a long enough term
for the businesses’ needs.
what is a convertible bond
This has the option to convert to ordinary shares in the company in the future, subject to conditions, the terms of which will vary from stock to stock (e.g. different conversion periods and number of shares received). Coupons are lower compared to standard corporate bonds to compensate for the ability to convert to shares on the conversion date in the future and reap the rewards of a favorable share price. They trade at a premium to the value of the shares they can be converted into.
If a conversion doesn’t take place then it will usually revert to a standard corporate bond with an option for the company to redeem any outstanding stock
How are convertible bonds taxed when converted to shares?
where there is a conversion option, the normal exemption from CGT for bonds held by individuals will not apply. i.e any gains on disposal are chargeable to CGT and
losses can be offset against other taxable gains.
What is a fixed charge?
A charge over a specific asset(s) e.g. land, property held on a freehold basis. Essentially things that should not fall in value over the term of the loan.
They cannot be sold without the consent of the person that holds the debenture.
Highest priority out of the two charges on company wind up.
What is a floating charge?
Rather than being a charge over a specific asset, a floating charge is over any company asset(s) that aren’t already being used as security elsewhere. It might help to think of it as “floating” over all of the assets.
As such it can be sold as the company carries on its normal business activities, as long as there are sufficient assets left to repay the debenture holder should it not be able to repay the loan.
What are floating rate notes?
With this type of bond, the rate of
interest is linked to a specific money market rate (such as SONIA) and reset every quarter and quoted as an amount above that money market rate. E.g. SONIA + 0.75%
What are PIBS
PIBS were bonds offered by building societies which are then listed on the stock exchange. There is no set redemption date and importantly, there is the facility for
the building society to miss interest payments which do not then have to be made up later. Equally, they are not
covered by the Financial Services Compensation Scheme.
Because of these risks, the returns tend to be high.
Where a building society demutualises, the PIB becomes known as a Perpetually Subordinated Bond (PSB), the features remain the same.
No new PIBs/PSBs are now issued as they don’t meet regulatory requirements.
