Module 42.1: Bond Indentures, Regulation, and Taxation Flashcards
What happens when market interest rates increase or decrease?
when market rates increase, the value of bonds decrease because the present value of a bond’s promised cash flows decreases when a higher discount rate is used.
Why must bonds with lower credit quality offer higher yields?
to compensate investors for taking on higher default risk.
What are perpetual bonds?
bonds with no maturity date but pay periodic interest
What is a pure discount bond and a zero-coupon bond?
bond issued at a discount and the interest is all paid at maturity when bondholders receive the par value.
What is a dual currency bond and a currency option bond?
dual currency bond - makes coupon interest payments in one currency and the principal repayment in another
currency option bond - gives bondholders a choice which currency they prefer to receive repayments in
What are examples of negative covenants in the bond indenture?
restrictions of asset sales, additional pledge of collateral, restrictions on additional borrowing.
negative covenants restrict the issuer from doing things.
What are examples of affirmative covenants?
timely interest payments, LTV covenants, and comply with applicable laws and regulations
affirmative covenants require the borrower to perform certain things.
What are eurobonds?
issued outside the jurisdiction of any one country and denominated in a different currency. less regulation.
what are securitized bonds?
bonds to an SPV
Why are SPV’s called bankruptcy remote vehicles?
the assets in the SPV will be used to repay principal of the bond, even if the underlying company is facing financial trouble.
what is unsecured vs. secured bonds?
unsecured - backed by an overall claim to assets and cash flows
secured - backed by a claim to a specific asset in the corporation
What are equipment trust certificates?
debt securities backed by equipment such as railroad cars and oil drilling rigs.
What are covered bonds?
similar to asset backed securities, but the underlying assets remain on the balance sheet of the issuing corporation (no SPE is created).
There is typically recourse to the firm that issued the covered bonds if the originally pledged asset cannot repay bond principal.
What are cash reserve funds and excess spread account?
credit enhancement in addition to over collateralization.
cash reserve - fund of cash set aside to make up for credit losses
excess spread account - larger return expected on the underlying assets.
What are examples of third party credit enhancements?
1) surety bonds - promise to make up any shortfall in the cash available to service the debt
2) bank guarnatees - serve the same function as surety bonds
3) a letter of credit - lend money to the issuing entity if it doesn’t have cash.
