Flashcards in Corporate Debt Securities Deck (20):
Corporate bonds are also known as...
Senior securities, because they rank above general creditor claims and both come before equity securities
The Trust Indenture Act 1939 covers which type of bonds?
New issues of corporate bonds. Note the Act doesn't cover municipal or government bonds.
What's the threshold above which a corporation must provide an indenture under the Act?
Indenture is with a trustee
Name 7 items in an indenture...
1. Amount of issue
2. Maturity date
3. Coupon rate and payment dates
4. Collateral (if applicable)
5. Conversion terms
6. Early retirement provisions
7. Restrictive covenants (eg liquidity or capital ratios)
The Securities Act 1933 requires SEC registration for what type of corporate debt security?
An issue with a maturity >270 days
A closed-end indenture limits issue of additional bonds against the same collateral.
What protections typically apply to an open-end indenture?
- must meet earnings target before additional issue (earnings test / additional bond test)
- maintenance of specified working capital
- limit common stock dividends
- ratio of total debt : total assets
Name three types of secured bond
- Mortgage bond (against real property)
- Equipment Trust Certificate (bond redeemed faster than asset depreciates so high level of protection)
- Collateral Trust Bond (against securities of another corporation)
Unsecured bonds are known as...
(Two ranks - debentures and subordinated debentures)
Advantages of convertible bonds - list three
1. Issued at lower interest rate than a non convertible issue
2. Investor sits before preferred and common stockholders in a liquidation
3. Conversion can reduce long term debt and improve interest coverage ratio
How do you calculate the conversion ratio?
Par value of bond ($1000) divided by conversion price
Parity price of a bond is conversion ratio x market price of stock
What's the difference between a Eurobond and and Eurodollar Bond?
Eurobond – bond sold in a country other than the one in whose currency it is denominated
Eurodollar Bond – a dollar bond outside US. They are not registered in US and can't trade in US for at least 40 days
Where do most corporate bonds trade?
OTC market as most not listed
How are corporate bond prices quoted?
As $ price percentage of par, quoted in points and eighths of a point.
93 4/8 = 93.5 = $935
How are corporate bond trades settled?
Regular way (T+3) unless a cash transaction
How is the final transaction amount calculated?
Purchase price plus accrued interest
Seller due interest up to but not including settlement date.
Calculated on a 360 day year.
What grades are investment grade?
Moody's: Aaa, Aa, A, Baa
S&P: AAA, AA, A, BBB
What's the window to report TRACE transactions?
What types of fixed income securities are reported on TRACE?
- Investment, non-investment grade and split rated securities
- SEC registered debt securities
- Securities issued under 1933 Act and traded according to 144a
- Debt securities issued or guaranteed by US govt agency or govt sponsored enterprise
What are income/adjustment bonds?
Pay principal at maturity but only pay interest if earnings pass a certain level. Trade flat and at a discount