Unit 4: Corporate Debt Flashcards
What is difference between secured and unsecured debt?
Secured debt is usually backed by certain assets
What are different types of secured bonds?
Mortgage bonds - Backed by real estate or land
Equipment Trust Certificates - Backed by some equipment owned by a company (planes, trains, trucks, rolling stock)
Collateral Trust Bonds - backed by securities of another company
What are unsecured bonds backed by? What are they called?
Backed by full faith and credit
Called debentures, subordinated debentures are even lower
What is the liquidation proceedings?
1, Secured creditors
- Administrative expense claims (taxes, current wages)
- General creditors (unsecured, debentures)
- Subordinated (subordinated debentures)
- Preferred stock holders
- Equity holders
What is an income bond?
Interest is payable if the income is sufficient
Issued by companies in a reorganization
What is a high yield bond? What is the threshold for high-yield ratings?
Low ratings have higher yield
Junk bonds or high yield bonds
Lower than:
Moody’s: Baa3
S&P: BBB
Fitch: BBB
What is a stepped coupon bond?
Issued with a low coupon rate that increases at regular intervals
Issuers generally have a right to call these bonds on date of coupon adjustment
Also referred to as dual coupon or step-up coupons
What is a zero-coupon bond? How is it priced? How does the carrying value work? What are the tax implications? Is there reinvestment risk? Who is suitable for?
Pays 0 annual interest
Issued at a deep discount to face value
Maturity: Matures at face value –> difference is interest income
Carrying value: cost basis must be accreted yearly
Tax: You pay taxes on the accreted interest income yearly, and then gain or loss based on where the par value is
They trade flat
No reinvestment risk
Suitable for someone trying to pay for college or for retirement- you know exactly how much money you will have
What is sovereign debt?
Debt issued by a foreign national government
Country’s repayment ability is reflected in the debt’s yield
What are Eurodollar bonds? Where can they not trade? What is that period called?
Principal and interest paid in USD but issued from an issuer outside of the US (usually Europe)
Foreign corporations, foreign governments, international agencies
Cannot trade in the secondary market until a seasoning period has elapsed (generally 40 days)
What is a Yankee Bond? What are is registration statuses?
Allow foreign entities to borrow money in US marketplace
Registered with the SEC and sold primarily in the US
Can immediately trade in the secondary market in the US
What is a Eurobond?
Sold in one country, but denominated in another currency
Issuer, currency, and primary market might be different
What are brokered CDs?
Generally offered by broker-dealers and have different characteristics than typical bank offered CDs
If not a bank product, FDIC insurance will not apply
Fees or comissions may apply
Maturities generally longer than one year
Call features may apply
Limited secondary market will influence liquidity
What is commercial paper? Why the time frame?
Unsecured debt obligations of companies staisfying short-term liabilities
- Maturities of <270 days
- To be exempt from 1933 security act requirements
What is an exchange traded note?
Structured product that is issued as unsecured debt - linked to an underlying market index / benchmark
Trade on exchanges, have low fees, and provide access to challenging areas of the market
Backed by full faith and credit of the issuer
Not principal protected - linked to performance of an asset
Might be purchased on margin, sold short, and traded on an exchange
Issuer obligated to deliver performance at maturity
