Unit 2

Front 1

An investor purchases 5M ABC J&J 15 8s of 09

Back 1

- 5M - 5 $1,000 bonds
- ABC - issuer of the bond - corporate bond because its three letter name
- J&J 15 - pays interest on Jan 15 and july 15
- pays 8% annually - nominal rate
- 09 - will receive the principal at maturity in 09

Front 2

three bond maturities

Back 2

1) term maturity - principal of the whole issue matures at once - all principal repaid at one time - may establish a sinking fund to retire the bonds to at maturity
2) serial maturity - schedules portions of the principal to mature at inviterals
3) balloon maturity - combination - repays part of principal before maturity and pays the rest at maturity

Front 3

coupon bonds

Back 3

- called bearer bonds
- no proof of ownership needed to sell a bearer bond
- holders collect interest by clipping coupons recieved at sale and deliver them to the paying agent

Front 4

types of bonds

Back 4

1) registered bonds - bondholders name is recorded and is on certificate
2) fully registered - registered as to both interest and principal - most common
3) principal only registered - owners name printed on the certificate but the couponsa re in bearer form - when sold the new owners names are recorded in order on the certificates and on the issuers registration record - no longer issued
4) book entry bonds - no not receive certificates - transfer agen maintains security's ownership records

Front 5

corporate bond quotes

Back 5

- states as percentages of increments of 1/8
- 98 18 means 98 and 1/8% or 98.125%
- quotes in points - one point is 1% of 1,000 or $10
- there are 100 basis points in each point

Front 6

investment grade

Back 6

- a municipal bond must be investment grade, a rating of BBB/Baa or higher, to be suitable for purchase by banks
- also known as bank grade bonds

Front 7

Government agency issues

Back 7

- second highest degree of safety - government only backs GNMA
- GNMA - FFCB (Federal farm credit banks) - FHLMC (freddie Mac) - FNMA (Fannie Mae)

Front 8

Municipal issues

Back 8

- 3 level of safety - GO bonds
- backed by the taxing power of the issuer - safer than revenue bonds

Front 9

corporate debt

Back 9

- runs from very safe to very risky in this order:
- secured bonds
- debentures
- subordinated debentures
- income bonds

Front 10

sinking funds

Back 10

- trust indenture requires this to be used to call bonds, redeem bonds at maturity, or buy back bonds in the open market
- improves the bonds marketability

Front 11

refunding and prerefunding

Back 11

refunding - raising money to call a bond - issuer reifinancing
prefunding - known as advance refunding - new issue is sold at a lower coupon before original bond issue can be called - issuer pre-refunds a bond issue to lock in a favorable interest rate
- prerefunded bonds are AAA rated, considered defeased, are escrowed in government securities, marketability increases, once pre-refunded the issue is no longer considered part of the outstanding debt of the issuer

Front 12

puttable bonds

Back 12

- in return for lower interest rate, investor receives the right to put or sell the bond at full face value
- once puttable, the investor has the right once e year to force the issuer to buy back the bonds at par
- most commonly found in municipal bonds
- investor is protected against market risk