Higher Bond Rating = Lower Yield

Low Bond Ratings= Higher Yields

Reason becaue of the uncertaintinies of being paid back for the loan

Highest degree of Safety because they are backed by the US Government

Include (Treasury bills, notes, and bonds and savings bonds like Series EE and HH Bonds)

Issued by Federal Credit banks, such as Fannie mae or Freddie Mac or the GNMA, second highest degree of safety is in securities.

Not backed by the government

Range from AAA to Junk Bonds, backed in different ways

• Secured bonds
• debentures
• Subordinated debentures
• income bonds

Liquidity

The ease with which a bond can be sold, lost of factors.

Size, quality, rating, maturity, call features, issuer, if it is a sinking fund.

Also known as Marketability

A bond is redeemed when its principal is repaid to the purchaser, usually on a maturity date.

Can be a call, a refunding or a prefunding

An issuer can put a call option onto a bond, where they can call the bond on a particular date to have the bondholder redeem it before its maturity date.

The difference between the call price and the par price.

Gives flexibility to the issuer for financial management, usually pays bondholders a higher price than par because of the call option.

Investors are faced with having to replace a relatively high fixed income investment with one tha tpays less.

Bonds are called when interest rates are lower than they were when bonds were issued.

also known as advanced-refunding, a new issue is sold at a lower coupon before the original bond issue can be called.

Used to lock in favorable interest rates.

AAA Rated

Considered defeased

Funds are escrowed in government securities

Marketability of the pre-refunded bonds increases

No longer considered part of the outstanding debt of the issuer.

Puttable Bonds

Bonds with a put option

The investor accpets a lower interest rate with the option to put, or sell, teh bond to the issuer at the full face value.

Once the bond becomes puttable the investor has the right once a year to foce the issuer to buy back the bonds at par value

expresses the cahs interest payments in relation to the bond's value.

Yield is determined by the issuers credit.

Bond's don't normally trade at par, they trade at a discount or a premium  and are taken into the yield of bonds.

Coupon Payment relative to its market price, as shown in the following equation:

Coupon Payment/ market price= current yield

Prices and Yields move in inverse directions

The annualized return of the bond if held to maturity.

Calculation:
Annual Interst-(Premium/Years to Mature)/Avgprice of the bond

Also can be called a basis

The average price= Price paid+Par Value/2

Or midway between the purchase price and the par value.

A bond that can be redeemed before maturity at the issuers option.

Callable bonds are likely to be called if the coupon rate is higher than the market rate.

Ranking Yields for Bonds

Lowest to Highest

Discounts

Nominal

Current Yield (CY)

YTM

YTC

Premiums

YTC

YTM

CY
Nominal

a bond that the issuer has identified specific assets as collarteral for interest and principal payments

If it defaults the bondholder claims the collarteral.

Another company's stocks and bonds

Stocks and bonds of partially or wholly owned subsidiaries

Pledging company's prior lien long term bonds that have been held in trust to secure short term bonds

installment payment or other obligations of the corporations clients.

Equipment notes or bonds, to finance the purchase of capital equipment.

Have depreciation just the the assets it is used to finance

Debentures

or

Subordinated Debentures

or

Liquidation

Debentures

Hierarchy of claims during a company's liquidation

Unpaid Wages

IRS(Taxes)

Secrued debt (Bonds and mortgages)

Unsecured Liabilities (Debentures) and Creditors

Subordinated debt

perferred Stockholders

Common Stockholders

Advantage, they are sold at $300 to $400 dollars and mature at $1000.

Disadvantage, they are very volatile if interst rates change a little bit, these bonds swing quickly.

A zero bond because with no interest payments to reinvest their is no risk.

Only sure way to lock in a rate of return.

Make them more marketable

Sold at a lower coupon rate

Can eliminate a fixed interst charge as conversion takes place

Doesn't have an affect on stock price

can dilute shareholders equity when converted.

increase number of outstanding shares.

cause a shift in votes of the common stock.

Loss of leverage because it reduces debt.

Increase taxes because no longer a write off.

When teh two securities are equal dollar amount.

exmaple:

Market price of the bond/Conversion ratio

Market price of common stock*Conversion ratio

Explain the Difference Between T's
Bills

Notes

Bonds

T-Bills- short term bill which is sold as a discount from par, the return is the difference between par and purchase price.

T-Notes:pain interest every six months and are traded and issued as a percentage of par. 92.24 or 92 24/32s

T-Bonds-Long term issued as a % of par and pay interest every six months for 10-30 years.