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29 Cards in this Set
- Front
- Back
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What two acts do bonds need to be registered under when corporations issue them?
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Securites Act of 1933 and Trust Indenture Act of 1939
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What is an indenture?
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an agreement between the issuer and the trustee that is responsible for acting in the best interests of the bondholders
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Closed End Indenture vs. Open End Indenture
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Closed End Indenture provides must protection since a coproation cannot issue additional bonds on the same claim. Open End allows bonds to be issued on the same claim
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Difference between Secured and Unsecured Bonds?
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Unsecurted bonds are only backed by corporations credit, secured bonds are backed by assets
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Types of Secured Bonds and Associated Collateral
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Mortgage/Real Estate Equipment Trust/Equipment Collateral Trust/Stocks or Bonds |
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What are unsecured bonds that have a junior claim on other unsecured bonds?
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Subordinated Debentures
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What is a junk bond and what is the name of a bond that started at investment grade and became junk?
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A junk bonds ia bond with a rating below BBB by S&P or Baa by Moody's and a fallen angel is a bond that started at investment grade and is now junk
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What type of situation could often create guarenteed bonds?
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A parent company guaranteeing a bond that is issued by a subsidiary company
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What is the equation for conversion ratio?
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Conversation Ratio = Par value of bond/conversion price |
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What is the converstion value of a convertible bond?
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The market price of the stock multipled by the shares the bond would create
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What is parity for a convertible bond?
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When the convertible bond's conversion value is equal to its market price
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What is the disadvantage to an investor with convertible bonds?
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Dilution - if all the bonds are converted to stock the earnings per share will decrease
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Forced Conversion |
If the issuer calls the bond prior to maturity but the redemption price is less than the call value the bondholder is forced to convert the bond to extract the most value
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Arbitrage
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Someone can buy a convertible bond for one price but then convert it to stock and make money off the higher value |
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What is an income bond?
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Issued by companies in bankruptcy, the issuer will pay the principal amount but no interest. These bonds trade flat and sell at a steep discount
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What is the difference between a yankee bond and a Eurodollar bond?
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A yankee bond allows foreign entities to borrow money in th US, while Eurodollar bonds pay in USD but are issued outside the US and cannot be sold to the US until 40 days after issuance
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What is a Eurobond? |
A Eurobond is a bond sold in one country but denominated in the currency of another. For interest a Russian manufacturer sells bonds denominated in swiss francs in London.
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Reverse Convertible Securities |
The issuer agrees to pay a higher coupon in return for the ability to repay principal to the investor in the form of an underlying asset (rather than cash)
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Exchange Traded Notes
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Unsecured debt security linked to the performance of an index. All gains are paid at maturity. They are high risk because the issuer may not be able to repay
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Trade Reporting and Compliance Engine (TRACE)
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B-D's who execute transactions in corporate debt must report the txns to TRACE |
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Accretion Adjustment for Zero Coupon Bonds
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If a zero-coupon bond is purchased at 60 with 20 years to maturity, the cost basis is adjusted each year by 2 points (40 point discount from par/20 years to maturity). Taxes would be paid on those two points
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What is amortization?
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When corporate bonds are purchased at a premium amortization is used to adjust the cost basis. For example, a bond at 110 with 10 years to maturity will have its cost basis adjusted downward by one point each year
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What is the difference between funded debt and money-market securities?
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Funded debt has a maturity of more than one year while debt less than one year is a money-market security
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Commercial Paper
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Corporations use this for short-term financing, it is unsecured debt that matures in 270 days or less. Typically issued at a discount
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Bankers Acceptances
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Instruments used to facilitiate foreign trade. Allow you to pay for something on a bill that will come due in two weeks, for instance, and the receiver can then decide to cash it in or wait for its full value
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Repos (Repurchase Agreements)
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A dealer sells securities to another dealer and agrees to repurchase them at both a specific time and price. If a dealer purchases securities and agrees to resell it, its a reverse repo
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Negotiable Certificates of Deposit (CDs)
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Time deposits with fixed rates of interest and mature after a specified period. Holders are penalized if they return them early
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What are step-down and step-up CDs?
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A step-down CD (only for long-term CDs which are not money-market securities) offers interest rates that are initially higher than current market rates but then come down. Vice versa for step-up
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Federal Funds
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One bank with excess reserves may lend to another bank overnight. The rates on these trades are the fed funds rate, and is a leading indicator of interest rates
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