Debts Instruments Flashcards
What is corporate debt
Corporations will issue bonds in an effort to raise working capital to build and expand their business. Corporate bondholders are not owners of the corporation; they are creditors of the company. Corporate debt financing is known as leverage financing because the company pays interest only on the loan until maturity. Bondholders do not have voting rights as long as the company pays the interest and principal payments in a timely fashion. If the company defaults, the bondholders may be able to use their position as creditors to gain a voice in the company’s management.
What are US Government bonds.
The U.S. government is the largest issuer of debt. It is also the issuer with the least amount of default risk. Default risk is also known as credit risk, which is the risk that the issuer will not be able to meet its obligations under the terms of the bond in a timely fashion. The U.S. government issues debt securities with maturities ranging from 3 months to 30 years. The Treasury Department issues the securities on behalf of the federal government, and they are a legally binding obligation of the federal government. Interest earned by the investors from U.S. government securities is only taxed at the federal level. State and local governments do not tax the interest income.
What are municipal bonds
Both state and local governments will issue debt securities to meet their goals. Municipal bonds are issued to meet a variety of needs, from working capital to bridge and tunnel projects. Once bonds have been issued, they become a legally binding obligation of the state or municipality. Interest earned by investors will be free from federal taxes and may be free from state and local taxes if the investor purchases a municipal bond issued by the state in which he or she resides.
What are bearer bonds
Bonds that are issued in coupon or bearer form do not record the owner’s information with the issuer, and the bond certificate does not have the legal owner’s name printed on it. As a result, anyone who possesses the bond is entitled to receive the interest payment by clipping the coupons attached to the bond and depositing them in a bank or trust company for payment. Additionally, the bearer is entitled to receive the principal payment at the bond’s maturity. Bearer bonds are no longer issued within the United States; however, they are still issued outside the United States.
What are registered bonds
Most bonds are now issued in registered form. Bonds that have been issued in registered form have the owner’s name recorded in the books of the issuer, and the buyer’s name will appear on the bond certificate.
Principal-Only Registration Bonds that have been registered as principal only have the owner’s name printed on the bond certificate. The issuer knows who owns the bond and who is entitled to receive the principal payment at maturity. However, the bondholder will still be required to clip the coupons to receive the semiannual interest payments.
Fully Registered Bonds that have been issued in fully registered form have the owner’s name recorded for both the interest and principal payments. The owner is not required to clip coupons, and the issuer will send out the interest payments directly to the holder on a semiannual basis. The issuer also will send the principal payment as well as the last semiannual interest payment directly to the owner at maturity. Most bonds in the United States are issued in fully registered form.
What are book entry bonds
Bonds that have been issued in book entry or journal entry form have no physical certificate issued to the holder as evidence of ownership. The bonds are fully registered, and the issuer knows who is entitled to receive the semiannual interest payments and the principal payment at maturity. The investor’s only evidence of ownership is the trade confirmation, which is generated by the brokerage firm when the purchase order has been executed.
What info is included on a bond certificate
Name of issuer. Principal amount. Issuing date. Maturity date. Interest payment dates. Place where interest is payable (paying agent). Type of bond. Interest rate. Call feature (if any or noncallable). Reference to the trust indenture.
What influences bond pricing
Rating Interest rates Term Coupon rate Type of bond Issuer Supply and demand Other features (e.g., callable, convertible)
What are bond yields
A bond’s yield is the investor’s return for holding the bond. Many factors affect the yield an investor will receive from a bond, such as: Current interest rates.
Term of the bond
Credit quality of the issuer
Type of collateral Convertible or callable
Purchase price
What is nominal yield
A bond’s nominal yield is the interest rate that is printed, or named, on the bond. The nominal yield is always stated as a percentage of par. It is fixed at the time of the bond’s issuance and never changes. The nominal yield may also be called the coupon rate.
What is current yield
The current yield is a relationship between the annual interest generated by the bond and the bond’s current market price. To find any investment’s current yield use the following formula: annual income/ current market price For example, let’s take the same 8% corporate bond we used in the previous example on nominal yield and see what its current yield would be if we paid $ 1,100 for the bond:
annual income = 8% × $ 1,000 = $ 80 current market price = 110% × $ 1,000 = $ 1,100 current yield = $ 80/ $ 1,100 = 7.27%
Let’s see what the current yield for the bond would be if we paid $ 900 for the bond: annual income = 8% × $ 1,000 = $ 80 current market price = 90% × $ 1,000 = $ 900 current yield = $ 80/ $ 900 = 8.89%
What is yield to maturity
The yield to maturity of a bond is the investor’s total annualized return for investing in the bond. A bond’s yield to maturity takes into consideration the annual income received by the investor as
The yield to maturity for a bond purchased at a premium will be the lowest of all the investor’s yields. Although an investor may purchase a bond at a price that exceeds the par value of the bond, the issuer is only obligated to pay the bondholder the par value upon maturity. For example: An investor, who purchases a bond at 110, or for
The yield to maturity for a bond purchased at a discount will be the highest of the investor’s yields. In this case, the investor has purchased the bond at a price that is less than the par value of the bond. In this example, even though the investor paid less than the par value for the bond, the issuer is still obligated to pay the full par value of the bond at maturity, or the full $ 1,000. For example: An investor who purchases a bond at 90, or for $ 900, will still be entitled to receive the full par amount of $ 1,000 at maturity, therefore gaining $ 100. This gain is what causes the yield to maturity to be the highest of the three yields for an investor who purchases a bond at a discount.
What is secured bond
A secured bond is one that is backed by a specific pledge of assets. The assets that have been pledged become known as collateral for the bond issue or the loan. A trustee will hold the title to the collateral, and in the event of default the bondholders may claim the assets that have been pledged. The trustee will then attempt to sell off the assets in an effort to pay off the bondholders.
What is a mortgage bonds
A mortgage bond is a bond that has been backed by a pledge of real property. The corporation will issue bonds to investors and will pledge real estate owned by the company as collateral. A mortgage bond works in a similar fashion to a residential mortgage. In the event of default, the bondholders take the property.
What is a collateral trust certificate
A collateral trust certificate is a bond that has been backed by a pledge of securities that the issuer has purchased for investment purposes or by shares of a wholly owned subsidiary. Both stocks and bonds are acceptable forms of collateral as long as they have been issued by another issuer. Securities that have been pledged as collateral are generally required to be held by the trustee for safekeeping. In the event of a default, the trustee will attempt to liquidate the securities that have been pledged as collateral and divide the proceeds among the bondholders.
