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Characteristics of all Bonds
Long-term Debt Instruments
Corporations may raise funding by issuing bonds.
Bonds require borrowers to make periodic interest payment and repay the principal at the maturity date.
Indenture
Each debt agreement has terms the debtor must meet.
Stated in a legal document
Trustee
Representative of the rights of bondholders who enforces the terms of the indenture.
Yield
Return on a bond expressed
Current yield
Yield to maturity
Risk to bondholders
Default- failure to meet the terms of the indenture
Fluctuations in Interest rates
Reinvestment Rate risk
Loss of purchasing power
Importance of Credit Ratings
Investment Grade - Triple B or Higher
Non-investment grade(High-yield bonds)
Mergent’s and Standard and Poor’s ratings
Variety of Corporate Bonds
Mortgage Bonds
Equipment Trust Certificates
Debentures
Subordinated Debentures
Income Bonds
Convertible Bonds
Variable Interest Rate Bonds
Zero Coupon Bonds
Retiring Debt
Bonds issued in a series (Serial Bonds)
Sinking Funds
Call Feature
Repurchases
Federal Government Securities
Treasury Bills
Treasury Notes and Bonds
Valuation of Bonds
Value of a bond is equal to the present value of the cash flows that bond will pay
Bond pays cash flows in Coupon Payments or Face Value
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