Professional Documents
Culture Documents
Trustee
A representative of the rights of
bondholders who enforces the
terms of the indenture.
the potential of gaining
or losing something of
value
Risk
Risk that the interest and principal will not be
repaid;
Risk that the price of the debt instrument may
decline;
Risk that inflation will erode the purchasing
power of the interest payment and principal
repayment.
Risk of default on interest and principal
payments varies with different types of
debt.
Federal Government has no risk of default
Debt of firms or individuals not so riskless
Credit Ratings
Classification scheme designed
to indicate the risk associated
with a particular debt instrument.
Mergents Bond Ratings
Aaa Bonds of highest quality
Aa Bonds of high quality
A Bonds whose security of principal and interest is considered
adequate but may be impaired in the future.
Baa Bonds of medium grade that are neither highly protected nor
poorly secured.
Ba Bonds of speculative quality whose features cannot be
considered well assured.
B Bonds that lack characteristics of a desirable investment.
Caa Bonds in poor standing that may be defaulted.
Ca Speculative bonds that are often in default
C Bonds with little probability of any investment value (lowest
rating)
For ratings Aa through B, 1, 2, 3 represent the high, middle, and low ratings
within the class.
Standard and Poors Ratings
AAA Bonds of highest quality
AA High-quality debt obligations
A Bonds that have strong capacity to pay interest and
principal but may be susceptible to adverse effects
BBB Bonds that have an adequate capacity to pay interest and
principal but are more vulnerable to adverse economic
conditions or changing circumstances
BB Bonds of lower medium grade with few desirable
investment characteristics
B and Primarily speculative bonds with great uncertainties and
CCC major risk if exposed to adverse conditions
C Income bonds on which no interest is being paid
D Bonds in default
Whats the use of
credit ratings?
Risk of price fluctuations.
Interest Price of
Rates Debt
Interest Price of
Rates Debt
Risk of inflation
Reduces the purchasing power of the
interest and principal;
Higher rate of interest to offset the
effects of inflation.
WHAT ARE
CORPORATE BONDS
CORPORATE BONDS
To raise money for
capital
expenditures,
operations and
acquisitions
=14.86%
High-yield securities
These are also known as JUNK
BONDS.
These are poor quality debt
with very high yields , which
may be 3% or 4% higher than an
ordinary high quality bond and
high probability of default.
FOREIGN
BONDS
FOREIGN BONDS
A bond that is issued in a domestic
market by a foreign entity, in the
domestic market's currency.
Example: Bond that is issued by a non-
U.S. entity but then trades in
the U.S. market.
YANKEE
SAMURAI
BONDS
BONDS
ITS
EFTYPESK
BE N RI
BULLDOG
S
BONDS
EUROBONDS
Bonds sold in a foreign country but
denominated in the currency of the
issuing firm.
Individuals who
owned the bonds
and lived on the
fixed interest
payments.
What is Registered Bonds?
These are issued as engraved
certificates.
The issuer maintains a record of who
owns each bonds.
The owners name and address are
printed on the certificate.
To transfer ownership, the current
owner endorses the certificate and
presents it to the issuers transfer
agent.
Carolina, Clinchfield and Ohio Railroad 5% registered
bond of 1938. The bonds term was thirty years. This
specimen has been cancelled by the transfer agent
by punching holes along the bottom.
2 Kinds of
Registered
Bonds
Partially Registered Bonds
Are also called registered coupon
bonds or registered as to principal
only.
This is a bond in which the principal is
registered inn the investors name.
The bearer coupon payments can go to
anyone, but only the person named on
the bond can claim the principal
payment at maturity.
This type of bond is still traded, but no
longer issued.
Fully Registered Bonds
Currently the most common
form of bond certificate.
This type of bond is registered
in an investors name and
doesnt have any bearer
coupons attached.
An investor doesnt have to
submit coupons to receive the
semiannual interest payments;
Book-Entry Securities
Book-Entry Securities (such as
stocks and bonds) whose
ownership is recorded
electronically.
It eliminates the need to issue
paper certificates of ownership.
Retiring Debt
Debt is often ultimately repaid
before the maturity date
Part of the issue is systematically
retired each year
Changes in interest rates may
cause a corporation to retire
bonds before maturity
Serial Bonds
Bond issue in which a portion of the
outstanding bonds mature at regular intervals
until all of the bonds have matured
Usually issued to finance specific projects that
provide income streams
Serial bonds (or installment bonds) describes a
bond issue that matures in portions over
several different dates. Instead of facing a large
lump-sum principal re-payment at maturity, an
issuer can opt to spread the principal
repayment over several periods.
Sinking Funds
A sinking fund is a means of repaying funds that
were borrowed through a bond issue. The issuer
makes periodic payments to a trustee who
retires part of the issue by purchasing the bonds
in the open market.
Eases the retirement of corporate bonds
Payment may be paid to a trustee
Another type of sinking fund:
Firm is required to retire a specified amount of
the principal each year
Permits the firm to buy back the bonds on the
Repurchasing Debt
If bond prices decline and the debt is
selling for less than face value or at a
discount, the firm may try to retire the
debt by purchasing it on the open
market.
A firm may retire debt by purchasing it
Selling at a discount means there is
immediate savings for the firms
stockholders
Voluntary act
GOVERNMENT SECURITIES
Pay interest & must be retired at some
specified time in the future
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