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50 Cards in this Set
- Front
- Back
Bonds (in general)
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Bonds are debt securities.
Bonds have a coupon rate - predetermined fixed interest rate paid semi-annually, but stated as an annual amount A point on a bond is equal to 1% of par value or $10.00 A bond has a par value of $1,000 and will return that $1,000 to the investor at maturity |
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Bond - Discount/Premium
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Bonds can be traded publicly.
Discount - bond's market price is less than the par value ($1,00) * The capital letter M stands for 1,000 Par - The market price is equal to par value ($1,000) Premium - The bond's market price is more than the par value ($1,000) |
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Series Bonds
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Hint: SS in series and in issue
Have different issue dates and usually have the same (term) maturity -frequently used for projects peformed in various stages |
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Term Bonds
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An entire issue of bonds that all have the same maturity date
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Serial Bonds
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Bonds with one issue date and staggered maturity. Because the maturities are staggered, the principal is paid down gradually which leads to lower interest costs as time passes
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Balloon Maturity
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Bonds with a large amount of the issue coming due at or near maturity
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Sinking Fund
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Money set aside to pay back a company's bonds, debentures, or preferred stock.
- Think term bonds. Sinking funds normally accompany term bonds - May be a mandatory debt retirement provision of a bond indenture -Adds to the safety of the bond / lowers the risk / lowers the yield |
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Funded Debt
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LONG TERM CORPORATE DEBT. Corporate debt that is due more than one year from the issue date
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Registered Bonds
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Bonds that are registered in the investor's name
- All bonds nowadays are issued like this - Interest is paid directly to the investor by the corporation's paying agent - principal is sent directly to the owner at maturity by the paying agent |
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Bearer Bonds
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Are not registered in the investor's name and have interest coupons attached, Clip the coupons and present them at the bank for interest payments.
- Stopped in my birth year (1983) |
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Registered as to Principal Only Bonds
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These bonds are registered in the investor's name, with coupons attached.
Clip coupons for interest. Principal is sent directly to the investor. |
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Three Categories of Bonds
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Corporate
Government Municipal |
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Issuer (CGM)
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(C) Publicly traded corporation
(G) Federal Government (M) State and local government |
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Taxation on INTEREST (CGM)
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(C) Fully taxable at federal, state, and local levels
(G) Fully taxable at federal level, exempt from state and local (M) Assume tax exempt at all levels unless specifically told otherwise |
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Risk (CGM)
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(C) Riskiest
(G) Safest - Govt can raise taxes or print money (M) Middle |
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Coupon Rate (CGM)
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(C) Highest - investors have to pay taxes at all levels
(G) Middle - investors only pay federal taxes (M) Lowest - exempt from taxes |
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SEC Registration (CGM)
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(C) Has to be registered with SEC
(G) Exempt from SEC registration (M) Exempt from SEC registration |
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Quotation Type (CGM)
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(C) $ in eighths
ex. 96 3/8 (G) $ in thirty-seconds, but it looks like a decimal ex. 9.06 = 9 6/32 = $9,187.50 (M) $ in eighths or YTM ex. 96 3/8 OR 4.75% |
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Basis Points
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A basis point is equal to 1% of a point. Remember, a point is worth 1% of par value
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Long Term vs. Short Term Maturities
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The longer the time until maturity of a bond, the more its price will decline when interest rates go up
When interest rates change: Short term maturities react the quickest. Long term maturities react the greatest. Long term bonds are ruskier than short term bonds. |
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Ranking the Safety of Bonds
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1) Maturity - shorter bonds are safer
2) Rating or Ranking - AAA, AA, A, BBB S&P, Fitch, Moody's |
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If Interest Rates...
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If interest rates are expected to go down...
Investors should invest in long term maturities. If interest rates are expected to go up.... Investors should invest in short term maturities. |
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How Are Corporate Bonds Traded?
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Most corporate bonds are traded in the over-the-counter market as dealer/principal transactions.
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Dealer/Principal
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The broker is working with their own inventory of securities.
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Dealer/Agent
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The broker is working as a middle man to bring two parties together.
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Corporate Bond Quotes
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Multiply by ten.
If a bond is quoted @ 96 then... the bond is trading at $960.00 |
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Leveraged Buy-Out
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Company A is trying to take over Company B by using company B's assets as collateral.
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Spin-off
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Corporate divestiture that results in the subsidiary of a company becoming its own company.
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Trust Indenture Act of 1939
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THINK CORPORATE BONDS.
Deed of trust that specifies the rights and duties of all parties. Issuer is required to appoint a trustee. The trustee protects the BOND HOLDERS. The act does not regulate - Gov't issues - Municipal issues - Private placements - Unit investment trusts (UITs) |
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Accrued Interest (1 of 2)
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Uses a 30-day month / 360-day year
Pays up to but not including settlement date Buyer pays seller for accrued interest |
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Accrued interest (2 of 2)
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Issuers pay interest payments on the 1st or 15th of the month (twice a year)
ex. Jun 1, Dec 1 To calculate the amount of accrued interest count back from when the bond was bought to the last time interest was paid. If it was paid on the 1st of the month, count 30 days. If it was the 15TH OF THE MONTH COUNT 16 DAYS! Accrued interest shows up on both the buyer's and seller's confirmation. It's added to the amount the buyer pays and added to the amount the seller receives. |
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Dollar Amount of Accrued Interest
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Principal x Coupon x Time in Days
_________________________ 360 |
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Taxes on Accrued intererest
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On the interest payment following the purchase of a bond, the buyer will deduct the accrued interest from the full interest payment and only pay taxes on the difference.
Say the coupon is $80.00 of a recently bought bond. Mr. Jones paid par plus $15.00 accrued interest. On the interest payment following the buy, Mr. Jones receives his $40 interest payment. He will only report $25 in taxes after taking into account the $15 he paid at time of purchase for accrued interest. |
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Corporate Bonds, Mortgage Bonds
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Mortgage bonds are debt instruments secured by real property.
Closed-end Mortgage Bond - property cannot be used as collateral for futute loans, unless the subsequent loan(s) are lesser in claim. Open-end Mortgage Bond - property can be used to secure subsequent loans. All debts will hold EQUAL claims General Mortgage Bonds - pledges all mortgageable properties of a corporation, but does not name any specific lots. |
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Corporate Bonds, Equipment Trust Certificates
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Issued by transportation companies to by new equipment.
Collateral is the new equipment. Also called rolling stock because the equipment usually has wheels (Railroad cars, airplanes, etc.) Trustee holds title to equipment until bonds are paid off. In event of default, bondholders have first right to equipment titles. Bonds are usually not callable, and are usually issued in serial form. These bonds rarely default because companies don't want to lose the equipment |
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Collateral Trust Certificate
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Uses securities of other corporations that the issuer owns - usually a parent company and its wholly owned subsidiary.
Collateral placed on deposit with trustee |
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Guaranteed Bonds
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Guaranteed by a company other than the issuer
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Debenture
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Bond backed only by good faith and credit - unsecured.
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Subordinated Debenture
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Debenture bond which holds a lesser claim than other debenture bonds, would be paid only after other debentures are satisfied.
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Junk Bonds
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A.K.A. HIGH YIELD BONDS
These are issued by newer companies or those with questionable credit strength Rated BB or lower or not rated at all usually MORE VOLATILE than investment grade bond HAVE HIGHER YIELDS AND LOWER PRICES THAN INVESTMENT GRADE BONDS |
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Fallen Angels
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Bonds that once were investment grade but have been downgraded.
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Income or Adjustment Bonds
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RISKIEST BOND THERE IS
Issued only by companies in deep financial shit. Income bonds PROMISE to pay interest ONLY IF THE COMPANY MAKES SUFFICIENT EARNINGS and the board declares that interest will be paid Principal is still due at maturity These normally trade flat (without accrued interest) Called Ajustment Bonds when used in a corporate reorganization. |
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Zero Coupon Bonds
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Sold at deep discounts and pay no interest while the bonds are outstanding.
Since they do not pay interest, they never have accrued interest. Instead they pay "imputed interst" or accretion. When calculation accretion one would use the purchase date, purchase price, and maturity date, but NOT THE CURRENT MARKET VALUE. At maturity, the investor receives one lump sum Prodcue "phantom income" which is taxed. Phantom income a way for the government to tax the accretion. (You pay taxes before you even touch the money) Purchased by investors who want capital accumulation. Good for investors planning for an event in the future - ex. college for kids. ZERO COUPON BONDS ARE THE MOST VOLATILE OF ALL FIXED INCOME SECURITIES. |
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Callable Bonds
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Bonds can be called (redeemed) at the option of the issuer, at a PRE-ESTABLISHED PREMIUM PRICE AFTER A SPECIFIC DATE
Call features are advantageous to issuers, not investors A low call price is attractive for the issuer, a high call price is not A call price places a ceiling on the appreciation possibilities of a bond because a callable bond will almost never have a market value higher than the call price. The issuer will call it before that happens. Everything else is even, a bond with a higher coupon rate is going to be called before one with a lower coupon rate. |
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Call Protection
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A fixed time period during which a bond can not be called.
Bondholders want interest rates to decline during this period. |
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When a corporate bond is called....
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1) the bondholder receives a premium
2) Credit worthiness of the company improves because it has less debt. 3) Debt to net worth ratio also decreases and improves (less debt) |
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Notice of Call
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Before a company can call its bonds. the company must give a "notice of call" During this time an invetor can..
a) Convert the bonds (and sell the common stock he receives) b) Sell the bonds c) Wait for redemption Interest payments stop after a call. Companies can do a partial call. Bondholders are selected at random for partial calls. Callable bonds usually trade at a lower price than non callables |
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Ratings of Bonds
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Credit ratings are assigned to bonds by MOODY'S, STANDARD & POOR'S, AND FITCH ----- NOT A.M. BEST
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Convertible Bonds
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Converting a bond is NOT A TAXABLE EVENT. It becomes taxable after you sell the common stock you receive from the conversion.
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Conversion Price Formula
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Par Value
-------------- = Conversion # of shares Price received |