258x Filetype PPTX File size 0.07 MB Source: csbweb01.uncw.edu
TYPES OF BONDS A. Mortgage bonds: bonds secured by real property B. Equipment trust certificates: bonds secured by equipment (rolling stock) C. Debentures: unsecured bonds (no collateral). D. Revenue bonds: interest paid only if a specified level of earnings is achieved TYPES OF BONDS E. Convertible bonds: bonds that may be converted into the firm's common stock F. Variable interest rate bonds: coupons that change with changes in interest rates G. Zero coupon bonds (also called pure discount bonds): don’t pay coupons. H. Callable Bonds: can be “called” prior to stated maturity (early redemption). CHARACTERISTICS OF ALL DEBT INSTRUMENTS A. Pay Interest (coupons) and have a fixed maturity value ($1000 for corporate bonds). B. Indenture Agreement 1. Loan agreement between lender and borrower. 2. Appoints the trustee; a fiduciary responsible for guarding the lenders' interests. 3. Indenture agreement provides for legal remedies if terms & conditions of indenture are not met. 4. May specify call provisions 5. May require a sinking fund or serial redemption CHARACTERISTICS OF ALL DEBT INSTRUMENTS C. Sources of risk 1. Default; probability of not getting all of the promised interest and principal. 2. Price; changes in prices as interest rates change over time. The longer the time to maturity, the greater the sensitivity. (See Fig 7-3) 3. Purchasing power; effects on inflation on buying power of coupon income. 4. Liquidity: inability to buy or sell at intrinsic value due to inactive market or small float. BOND VALUES AND BOND YIELDS A. Bond valuation model; 1. VB = Coupon * PVIFA + Face Value * PVIF 2. The value of a bond (VB) is a combination of a present value of an annuity (PV of coupons to be received) and PV of face value of the bond. VB is also the PV of all expected cash flows N CF V n for n 1, 2, 3, ..., N B (1k )n n1 b
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