Corporate Bonds Flashcards
What is a eurobond?
a bond sold outside of the currency it is denominated in.
Can issue debt without being restricted to your own marketplace.
Bearer form - dematerialised and held in Euroclear
Eurobond:
Interest Payments:
Tax:
Settled Through:
Settlement Period
Interest Payments: Gross
Tax: Untaxed at souce
Settled Through: Euroclear / Eurostream
Settlement Period: T+2
They trade over the counter
The market only accepts highly-rated companies, since eurobonds themselves are unsecured debt.
What is a foreign bond?
A bond issued in a domestic market by a foreign issuer
E.G £ bond issued in UK by a Chinese Entity
Samurai, Kangaroo, Bulldog etc.
What risk is higher in the corporate bond market compared to Govt?
Default / Credit Risk
What is a fixed charge?
A charge over a specific “defineable” asset of a company
If a company defaults or does not pay interest:
1) Appoint a receiver to get income from asset
2) Take possession of asset / sell it
What is a floating charge?
An equitable charge on all the company’s assets (present and future)
How can corporate bonds redeem?
1) Bullet Bond (principal paid all at once)
2) Serial Bond - Redeemed in installments until maturity
3) Optional redemption
4) Coupons
5) Zero Coupon Bonds
What are two examples of equity sweeteners?
Warrants - the right to buy a certain number of shares at an agreed price
Convertible - Convert the bond into equity
What are the advantages to the issuer of a convertible:
1) No immediate dilution of shareholders rights
2) Lower coupon than a normal bond
3) Suitable when assets are not available to secure financing
What are the disadvantages of a convertible to the issuer
Still has to make coupon payments / principal even if company fails to perform
What are the advantages of a convertible to the holder?
1) Security of fixed-income offering downside protection even if shares fall in value
2) Ranks above shares in liquidation
3) Offer higher yields than underlying shares
4) More marketable
What are the disadvantages of convertibles to the holders?
- Dilution may reduce existing shares
- Lower yield than equivalent straight bond
- Share growth may not be achieved and holder sacrified yield for no reason
What is the formula for conversion ratio?
Nominal Value / Conversion Price of Shares
What is a warrant?
Bonds with an attached warrant entitle the holder to a certain number of shares at a predfined price.
Like a call option but it is dillutive
What are the two primary ways bonds are traded?
1) Dealer to dealer (sometimes arranged by IDBs)
2) Dealer to clients (e.g. asset managers)
