Bonds - Corporate Flashcards
(24 cards)
2 types of corporate bonds 60
Secured ; Unsecured
Secured Bonds: Define ; who holds title 60
Issuer identified specific assets as collateral
Trustee holds title; on default bondholder lays claim tocollateral
3 types of Secured Bonds; define each 60
- Mortgage bonds: Highest priority of asset pledged as collateral;
- Collateral Trust bonds; on securities of other companies owned by corporation. Usually trustee holds; Collateral bonds may be backed by:
a. Another co’s stocks & bonds
b. Stocks & bonds of partially or whole owned subsdiary
c. prior lien L/T bonds that have been held in trust to secure short term bonds
d. installment payments or other obligations of corporatinos clients. - Equipment Trust Certificate; railroads, airlines, trucking & oil companies use; to finance purchase of capital equipment. Issued serially so amt outstanding goes down yr to yr in line with depreciating value; title held in trust till paid
Unsecured Bonds; define; types 61
No specific collateral backing
Debentures ; Subordinated Debentures.
Debentures: backed by general credit of co, debenture owner a general creditor
Subordinated: paid last of all debt obligations in liquidation; usually offer higher yields; often have conversion features.
On liquidation; what is hierarchy of who gets paid? 62
Preferred stockholders Common stockholders IRS (Taxes) Unsecured Liabilities (debentures) & general creditors common stockholders Unpaid wages Secured debt (bonds (closed end before open end) & mortgages) Subordinated debt
Unpaid wages IRS Secure debt Unsecured Liabilities Subordinated debt Preferred stockholders common stockholders
What are guaranteed bonds 62
Backed by a company other than issuer; usually parent company
What are income bonds? What are they also called? 62
Also called adjustment bonds
Used if co reorganizing or coming out of bankruptcy
Pay interst only if co income to meet payments and if BOD declares payment;
Missed int payments do not accumulate
NOT suitable if seeking income
What are zero coupon bonds? Who creates them? ADv’s and disadv’s? 63
Do NOT make regular int payments
Issued at deep discount to face value and mature at par
Issued by corporations, municipalities, and the US treasury
Adv
1. Relatively smaller investment
2. Allow speculation on interest rate moves
Disadv
1. Substantially more volatile than traditional bonds e.g. do cash interest payments
2. The longer the time to maturity, the > the volatility
When int rates change, zero’s price changes much more as a % of its market value than ordinary bond prices
What is unusual about taxation of zero-coupon bonds? 63
Pay no interest but every yr amt bonds accrete has to pay taxes on the phantom income. Accreted straight line basis over life. Good news: each yr basis goes up by income so no capital gain if held to maturity.
If sell before maturity will have cap gain/loss.
Which security has NO reinvestment risk? 64
Zero.
Locks in a rate of return as there is interest payments to reinvest.
What is a senior lien bond (65)
A closed-end indenture e.g. Corp cannot issue more bonds of the same class in the future. Any future issue has a subordinated claim on the collateral
What is difference B/w open-end and closed-end indentures and; What are prior lien bonds?
Used in Mortgage Bonds
Open ended: permits corp to issue more bonds of the same class. Subsequent issues are secured by the same collateral & have equal liens on property
Close ended: Corp does NOT permit corp to issue more bonds of the same class. Subsequent issue has subordinated claim on collateral
Prior Lien Bonds: Co’s in financial trouble issue mortgage bonds that take precedence over 1st mortgage bonds (but must have consent of 1st mortgage holders)
The Trust Indenture: Act, what is it, what 3 things are in the document? 64
Trust Identure Act of 1939
If corp bond, sold interstate, > $5m must have trust indenture
Specifies issuers obligation & bondholders rights & identifies trustee
When must have indenture? 3 major things it does
Trustee of an Indenture; what is his job, types 64
Trust Indenture Act of 1939
If corp bond, sold interstate, >5M then must have trust indenture
It 1. specifies issuers obligations 2. bondholers rights 3. Trustee…
Usually a commercial bank or trust company
Trustee monitors compliance with covenants of the indenture & may act on behalf of bondholders on default
Types:
Open end indenture bonds
Closed end indenture bonds (also called senior lien bonds)
Who is exempt from Trust indenture?64
Federal and municipal governments (although municipal revenue bonds often use it to make more marketable)
How do Corporate Bonds trade? 65
NYSE ; most trade on OTC market
Brokerage firms enlist bond brokers to execute orders on their behalf.
Gets small fee (commission)
NYSE Bonds - provides investors with cost-effective, real time automatic order execution.
SEC allows unlisted corporation debt issues
Antidilution Covenants & Convertible bondholders: What is antidilution convenants & when enacted & what document rules this covenant? 68
AC: investor % ownership is lessened by stock splits, stock dividends, and issuance of new shares.
Conv Bondholders is protection from trust identure
Forced Conversion. Define. 69
Issuer calls bond n bondholder best interest to convert bonds rather than have them called See example 69
Forced Conversion. Define. 69
Issuer calls bond n bondholder best interest to convert bonds rather than have them called See example 69
Reverse Convertibles: Define; what are yield differences & why; 69
Have imbedded put options that allow bond issuer the right, but not obligation, to convert bonds principal into shares of equity at predetermined set date. Exercised by if shares underlying option fall by certain price. Bondholders would receive shares rather than principal.at maturity.
Yields are higher because of risk to bondholder
Difference between convertible bond and reserve convertible 69
Convertible Bond
Shareholder has right to convert bond to equity (shares)
Reverse Convertible Bond
Issuer has right to convert bond to equity (shares) instead of cash on maturity
Convertible Bond: Define
Cost as compared to non-convertibles
Volatility as compared to non-convertibles
65
Corporate bonds that can be exchanged for fixed # of shares
Pay lower interest rates than noncovertible; generally trade in line with stock
Less volatile; convertible have fixed int payments & maturity dates
Convertible Bond Adv 65
Makes it more marketable
also
1. Can be sold for lower in rate than non-conv because of conversion feature
2. co can eliminate fixed int charges on conversion
3. Conv normally over time so doesn’t effect stock price
4. Rather than common stock corp avoids dilution of earnings per share
5. At issuance, conv price higher than MP of common stock
Convertible Bonds Disadv 66
- on conversion shareholders equity diluted
- become common shareholders & voice in co
- Reduction in dept means loss in leverage
- Decrease in int increases taxable income
