Debt Securities Flashcards
Term Maturity
All principal matures at a single date in the future
Trust Indenture Act of 1939
Requires corporate bond issues of $5 million or more sold interstate to be issued under a trust indenture, a legal contract between the bond issuer and a trustee representing bondholders
Balloon Maturity
A repayment schedule for an issue of bonds wherein a large number of the bonds come due at a prescribed time (normally at the final maturity date)
Yield to Call (YTC)
The rate of return on a bond that accounts for the difference between the bond’s acquisition cost and its proceeds, including interest income, calculated to the earliest date that the bond may be called by the issuing corporation
Zero-coupon Bonds (zeroes)
An issuers debt obligation that do not make regular interest payments.
Instead, zeros are issued, or sold, at a deep discount to their face value and mature at par.
Discounted purchase price - Full face at Maturity = Return or accreted interest the investor receives.
Funded Debt
Corporate bonds with maturities of five years or more
Conversion Price
Stock price at which a convertible bond can be exchanged for shares of common stock.
Ranking of Yields from Highest to Lowest
Discounts: Yield to Call (YTC) Yield to Maturity (YTM) Current Yield (CY) Nominal
Premiums: Nominal Current Yield (CY) Yield to Maturity (YTM) Yield to Call (YTC)
Call Provison
Syn. Call Feature
The written agreement between an issuing corporation and its bondholders or preferred stockholders giving the corporation the option to redeem his senior securities at a specified price before maturity and under certain conditions.
Income Bonds/Adjustment Bonds
Used when a company is reorganizing and coming out of bankruptcy.
Income bonds pay interest only if the corporation has enough income to meet the interest payment if the board of directors declares a payment.
Convertible Bonds
Corporate bonds that may be exchanged for a fixed number of shares of the issuing company’s common stock.
*Convertible bonds have fixed interest payments and maturity dates
Guaranteed Bonds
Backed by a company other than the issuer, such as parent company.
This backing effectively increases the issue’s safety.
Three basic types of maturity structures
Term Maturity
Serial Maturity
Ballon Maturity
Bondholders
Have neither ownership interest in the issuing corporation nor voice in management
Current Yield (CY)
Measures a bond’s coupon payment relative to its market price.
Coupon payment / Market price = current yield
Parity
Two securities are of equal dollar value
Municipal Securities
Debt obligations of State and local governments and their agencies
Serial Bond
A debt security issued with a maturity scheduled in which parts of the outstanding issue mature at intervals until the entire balance has been repaid.
*Most municipal bonds are serial bonds
Conversion Ratio|Conversion Rate
Expresses the number of shares of stock a bond may be converted into.
Par value / Conversion price = conversion ratio
Liquidation hierarchy of claims on company’s assets when company goes bankrupt
- Unpaid wages
- IRA (taxes)
- Secured debt (bonds and mortgages)
- Unsecured liabilities (debentures) and general creditors
- Subordinate debt
- Preferred stockholders
- Common stockholders
Pre-Refunded Bonds: 5 key facts
- AAA rated (cannot get any safer)
- Considered defeased
- Funds are escrowed in government securities
- Marketability of the pre-refunded bond increases
- Once pre-refunded, the issue is no longer considered part of the outstanding debt of the issuer
Refunding
Retiring an outstanding bond issue at maturity using money from the sale of a new offering
Yield to Maturity (YTM)
Reflects the annualized return of the bond if held to maturity
Formula:
Annual interest - (premium/years to maturity)
—————————————————————
Average price of the bond
Government National Mortgage Association (GNMA) key features
- $1,000 minimums
- Monthly interest and principal payments
- Taxes at all levels
- Pass-through certificates
- Significant reinvestment risk
