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34 Cards in this Set
- Front
- Back
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coupon |
stated interest payment made on a bond |
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face value |
principal amount of the bond that is repaid at the end of the term. Also, par value. |
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Coupon Rate |
The annual coupon divided by the face value of a bond |
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maturity |
date on which the principal amount of a bond is paid |
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yield to maturity |
The rate required in the market on a bond |
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Interest rate risk |
risk that arises for bond owners from fluctuating interest rates |
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Interest rate risk depends on two things |
time to maturity
the coupon rate |
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the longer the time to maturity |
the greater the interest rate risk |
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the lower the coupon rate |
the greater the interest risk rate |
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current yield |
bonds annual coupon divided by its price |
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Creditor |
person making loan, lender |
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Debitor |
corporation borrowing money, borrower |
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3 differences between debt and equity |
Debt is not an ownership interest in the firm Creditors generally do not have voting power
corporations payment of interest on debt is considered a cost of doing business, fully tax deductible. Dividends not tax deductible
Unpaid debt is a liability to the firm. if not paid creditors can claim assets of the firm. cost of issuing debt is financial failure. Possibility does not arise when equity is issued. |
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Why do corporations create debt securities |
One reason is that they try to create debt securities even though it is equity to obtain tax benefits of debts and bankruptcy benefits of equity |
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who is paid first? equity holders or debt holders? |
debt holders |
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indenture
aka deed of trust |
written agreement between the corportation and its creditors (the lender). trustee (bank, perhaps) appointed by corporation to represent bond holders |
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responsibilities of trust company |
1) Make sure terms of indenture are obeyed
2) Manage sinking fund
3) represent the bondholders in default incase they default on payments |
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Registered form |
form of a bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record |
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Bearer form |
form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond
-hard to recover if lost or stolen -since company does not know who owns bonds |
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Collateral |
General term that frequently means securities
commonly used to refer to any asset pledged on a debt |
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Mortgage securities |
secured by a mortgage on real property of the borrower
does not include cash or inventories |
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Debenture |
unsecured debt (bond), for which no specific pledge to property is made
10 or more years |
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Note |
unsecured debt, no pledge to property
less than 10 years |
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sinking fund |
account managed by bond trustee for purpose of repaying the bond early
company makes annual payments to the trustee who then uses the funds to retire a portion of debt rather than paying it all back at once at the date of maturity
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Call provision |
agreement allowing the corporation the option to repurchase the bond at a specific price prior to maturity |
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Difference between the call price and the stated value is called the |
call premium |
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Call provisions are not usually operative during the first part of a bonds life.. During the time it is not operative it is |
call protected
currently cannot be redeemed by the issuer |
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Protective Covenants |
part of the indenture (loan agreement) that limits actions that might be taken during the term of a loan, usually to protect the lender
positive- thou shalt- must abide by negative- thou shalt not- limits or prohibits |
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2 leading bond rating firms are |
Moody's
Standard and Poor's (S&P) |
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bond ratings |
how likely a firm is to default and the protection creditors have in event of a default
RATINGS ONLY HAVE TO DO WITH DEFAULT does not assess interest risk rate |
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Standard & Poors Moodys ratings |
AAA AA A BBB / BB B CCC CC C D Aaa Aa A Baa / Ba B Caa Ca C
Standards and Poors uses + and - as notches Moodys uses 1,2,3 as notches |
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Government bonds
aka treasury notes/bonds |
only federally taxed, exempt from state
no default risk
notes 2-10 years
bonds up to 30 |
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Municipal bonds
"munis" |
varying degrees of default risk, rated like corporate issues
exempt from state and federal tax |
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Zeros Coupon Bond |
A bond that makes no coupon payments and thus initially priced at a deep discount |
