Debt Securities Flashcards
Accrued interest
30 day month/360 day year basis
Corporate bonds
Municipal bonds
Actual/ month
US Govt bonds
Investor does not pay full annual interest payment since it’s not earned yet. Only pays half semi-annual
New bond holder is obligated to pay the rest of interest owed to previous bond holder
Trust indenture
A legal agreement outlining the terms of the loan between corporation and bond holders
Secured bonds
Backed by collateral to reduce the risks associated with lending.
If issuer defaults assets from collateral will be liquidated to pay the bond
Not risk-free
- Mortgage bonds
- Equipment trust certificates
- Collateral trust certificates
Mortgage bonds
Backed by the corporations real estate office buildings, Apartments, shopping malls
If bond defaults the property will be sold to compensate bond holders
Equipment trust certificates
Secured bonds backed by equipment
Collateral trust certificates
Backed by the securities of another company stock
If issuer cannot pay off then parent company’s underlying stock will be liquidated to pay the bond
Unsecured bonds
Are not backed by underlying assets or collateral
Not all unsecured bonds are risky
- Debentures
- Subordinated debentures
- Guarantee bonds
- Income bonds are
Debentures
Bond that issues not secured by any form of collateral
Backed by the general creditworthiness, promise to pay, issuers full faith credit
Subordinated debentures
Bonds carry a higher default risk and have to pay a higher interest rate to investors
Issuer may sell straight debentures and then follow up with an issuance of subordinated debentures which have a secondary claim
Guarantee bonds
Backed by the promise of issuer to pay but also a parent company
If issuer defaults, parent company must step in and make payments
Income bonds / adjustment bond
Issues by a corporation that is under reorganization and coming out of bankruptcy
TIPS
govt debt
Principal amount is adjusted every 6 months based on changes in CPI
Pay interest semiannually at $1000 par
No inflation risk
Treasury receipts
Backed by broker dealer
Zero coupon security
Like tstrips
T-Strips
Backed by US govt
Issued at discount and mature at face value up to 30 years.
Earn phantom income
Accretion is used to determine amount
Used to fund retirement since interest rate is fixed for long term
