Unit 2 5 Corporate Bond Features Flashcards
What are some of the features of corporate bonds?
1- Callable 2- Convertible 3- Put 4- Income or Adjustment 5- Guaranteed
Who does a Callable Bond benefit? The investor or the issuer?
Callable benefits the issuer!
If (general) interest rate fall lower the the bonds interest rate, the corp would retire (Call In) the bond, and issue a new bond with a lower interest rate. They would use the proceeds of the new bond to retire (pay off the investors) the older bond.
Since the Callable bond benefits the issuer, not the investor, what does the issuing company do?
The issuing company must offer an incentive for the investor to buy. There would be a Call Protection Period. No matter what happens to interest rates, we wil not call these bonds in for 5 yrs.! Or 6 yrs. or 7 yrs, et al.
What is another incentive issuers give to investors with Callable Bonds?
Pay a higher interest rate than non-callable Bonds.
What is a Convertible Bond?
Bond can be converted into the companies Common Stock!
Who would a Convertible bond be suited for?
Investor looking for Income and also interested in the growth of the Common stock that may occur in the future.
What is a feature of the rate of return for Convertible bonds?
Since the conversion feature has value, the issuer would pay a lower interest rate than non-convertible bonds.
How would a corp go about calculating the Conversion price for a Convertible bond?
Ex: Convertible bond that converts into 20 shares of Common stock. Take Par value $1,000 / 20 shares = conversion price of $50 per share. [$50 CP]
What is the investor hoping for with the Conversion of a Convertible bond into Common stock?
If share convert to say $50 per share, the market for that same common stock is say $60 per share.
What is a Put Bond?
Issued giving bondholder the opportunity to put the bond back on the issuer at the bondholder’s discretion.
Put bonds benefit the investor (bondholder).
What would happen to a Put bond if the interest rates went or go up?
The price of the bond would go down. The investor doen’t want the bond anymore. The Put Bond holder can “Put” the bond back on the issuer and get his money back.
The investor can then go and purchase a bond from the Market that could pay a higher rate of return.
What is an Income Bond aka Adjustment Bond
A bond who’s income will only be paid when the issuer is able to pay it. NEVER RECOMMEND AN INCOME BOND TO A CLIENT FOR INCOME!!!
What is a Guaranteed Bond?
Principle and interest is guaranteed by a Third Party.
Usually seen when a Parent co. has a spin-off of anothe branch or subsidary. The Parent Co wants to help this new co. get capitalized.
As a registered Rep., what do we have to be careful of with Guaranteed Bonds?
We can never guarantee anything as regards an investment. Only the Parent co. can make such a claim.
