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29 Cards in this Set

  • Front
  • Back
Corporate bonds are referred to Senior Securities because:
1) Bond holder's are creditors

2) Interest on bonds must be paid before preferred or common dividends.

3) Less riskier than stock due to prior claim on assets in a liquidation
Trust Indenture
-Contract between the ISSUER & TRUSTEE (Bank)

-Details the specific provisions of the bond issue

-Issuer files it w/SEC

1) Closed-End Trust Indenture

2) Open-End Trust Indentures
Closed-End Trust Indentures
-Does NOT allow for an additional bond issue to be secured by the same assets which secure the original issue.

-Provides highest protection for bond holders from dilution of their bond's security.
Open-End Trust Indentures
-Permits the issuance of additional bonds backed by the same assets which secure the original issue.

-Original bondholder's protection may be diluted

-Earning's Test or Additional Bonds Test = Issuer may be required to meet specific earnings requirements before issuing additional bonds
Secured Debt = Mortgage Bonds, Equipment Trust Certificates, & Collateral Trust Bonds because...
-A specific asset is pledged to back the bond if company defaults.

-If defalut, the trustee will take possession of the asset & then sell it to pay off the bond holders.

-Offer a high level of protection
Mortgage Bonds
-Backed by real property, i.e. factory or building.

-A lien is placed on the property guaranteeing its proceeds go to the bond holders in the event of a default.

-Usually issued in series

-Blanket Mortgage: When a mortgage secures such series equally
Equipment Trust Certificates
-Usually issued by transportation companies, i.e. railroads, airplanes.

-Backed by a specific piece of equipment (ex: airplane)

-Trustee holds the title to the equipment backing the bond until the principal is paid back to the bond holders.

-High Grade, Very Secure, Low Yields (Serial Issue)
Collateral Trust Bonds
-Backed by marketable securities deposited w/trustee

-Securities must be stocks or bonds of companies other than the issuer.

-Securities are typically a subsidiary of issuer.

Can NOT be backed by Real Estate.
-Unsecured corporate debt which is backed by "good faith & credit" of issuer.

-Riskier than secured debt, Higher yields.

-Subordinated Debentures have junior claims, Higher Yield, Greater Risk.
Other types of bonds (Debentures)
1) Income Bonds
2) Zero-Coupon Bonds
3) Guaranteed Bonds
Income Bonds

Adjustment Bonds

Junk Bonds
-Issuer promises to pay principal upon maturity, but will only pay interest if the company's earnings are sufficient.

-Trade flat w/o accrued interest.

-Sell @ deep discounts

-Issued by companies in regorganization (bankruptcy)
Zero-coupon bonds
-Pay no semi-annual interst

-Issued @ a discount to par & mature @ par value.

-Market prices are affected by interest rate movements, highly susceptible to INTEREST RATE RISK

-Accretion = Every year a portion of the discount must be addedtothe value of the bond.
Guaranteed Bonds
-Principal & interest payments are guranteed by another company

-If issuer can NOT pay, the guarantor must assume the payments to bond holders.

-Guarantor is parent company of the issuer
Convertible Bonds
Redeem bonds for stock in the company
Conversion Ratio

Conversion Rate
# of shares a bond holder will receive when they redeem their bond

Par Value / Conversion Price = Conversion Rate
Conversion Price
Share value upon redemptionof the bond

Par Value / Conversion Rate = Conversion Price
Parity Price
Price @ market value of stock & market value of bond are equal

Bonds Market Price / Conversion Rate = Stock's Parity Price

Stock's Market Price X Conversion Rate = Bond Parity Price
The ability to profit from price disparities in the market place.
Stock Splits
If a stock splits 2 for 1 & the converstion ratio was 20 shares/bond prior to the split, each bond would now be worth 40 shares (2/1 x 20 = 40), & the new conversion price would be reduced from $50 to $25 (1/2 x $50 = $25)
Stock Dividends
When stock dividend is declared, convertible bond holders benefit.
Advantages of convertible bonds to ISSUER
-Reduce interest costs

-Not immediately diluted for ownership

-Suppression of stock price would be unlikely
Disadvantages of convertible bonds to ISSUER
-Dividend payments will be diluted & not tax detuctible

-May alter controlling interest in the company

-May lead to uncertain financial structure for corp because unknown amound of bonds converted
Advantages of convertible bonds for the BOND HOLDER
-Stock price increases w/bond issue.
Disadvantages of convertible bonds for the BOND HOLDER
-Offer lower yields than non-convertible issues

-Issuer can force a conversion to reduce their debt service.
Eurodollar bonds
-Issued in foreign contries, but pay interest & principal in US dollars.

-Issued by multinationals, foreign gov't & int'l agencies

-Pay interest annually

-Convertible or zero-coupon

-NOT registered in US. Can NOT trade in US utnil atleast 3 months after issuance.
Yankee Bonds
-Issued in US by foreign corps & gov't

-Pay principal & interest in US dollars.

-Issued when conditions are more favorable in US than foreign countries.
Accrued Interest
For corporate bonds, 30 day, 360 day year.
Dated Date
First day on which a new bond issue begins to accrue interest. ON first interest payment date, the payment would be from the dated date up until but not including the payment date.
Taxation of interest
-Interest on corp bonds is taxed on fed, state & local as ordinary income

-Seller pays tax on accrued interest

-Annual interest minus the accrued interest paid upon purchase is ordnary income, for the buyer.