Corporate Bonds Flashcards
Corporate Bonds
The method commonly used for issuing corporate bonds is a PLACING. This takes very much the same form as a placing in equity issues, with underwriting of corporate bond issues common.
Domestic Bonds
A domestic bond refers to one in which the nationality of the issuer, the denomination of the bond and the country of issue are the same. For example, a sterling denominated bond issued in London by a UK company.
Foreign Bonds
A foreign bond is one in which the nationality of the issuer is different to that of the denomination of the bond and the country of issue, for example, a sterling bond issued in London by a US company.
Risk of Foreign Bonds
Credit / default risk: non-payment of interest or capital at redemption
Economic risk: different countries = different economies = different risks
Foreign exchange / currency risk: negative currency exchange movements
Interest rate risk: the inverse relationship between bond prices and interest rates
Liquidity risk: is it possible to sell a specific amount, at the price you want and at the time you want to?
Political risk: political instability can be a major factor (Venezuela?)
Eurobonds
A Eurobond is a security where the denomination of the bond and
the country of issue are all different. For example, a company issuing dollar bonds in Tokyo.
Commonly, Eurobonds are issued in the currency and country where the issuer finds it cheapest to raise the finance, and then swapped into the currency the issuer wants.
Security of a Bond
A debenture is a document which acknowledges a company’s secured debt instruments. That is, secured corporate bonds would be called debentures – secured on defined assets. Whereas, the term loan stock refers to unsecured corporate bonds.
Asset Backed Securities (ABS)
An asset-backed security (ABS) is a financial instrument secured by a pool of assets such as property or loans. They are issued by companies specially created for the purpose and are a
separate legal entity from the original owner of the underlying assets. This leaves them unaffected by any bankruptcy risk in the original owner. Cash flows from the pool of underlying assets (e.g. rental income or mortgage income) are distributed on a pro-rata basis to the holders of the ABS.
Mortgage Backed Securities (MBS)
An mortgage-backed security (MBS) is a financial instrument secured by a pool of securities home loans. They are
used by retail banks to securitise the cash flows from mortgages that would otherwise be receivable over, normally, a 25 year term.
