Term
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Definition
| the stated interest payment made on the bond |
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Term
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Definition
| the principal amount of a bond that is repaid at the end of the term |
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Term
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Definition
| the annual coupon divided by the face value of the bond |
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Term
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Definition
| the specified date on which the principal amount of a bond is paid |
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Term
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Definition
| the rate required in the market on a bond |
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Term
| Indenture (deed of trust) |
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Definition
the written agreement between the corporation and the lender detailing the terms of the debt issue
Includes:
1. the basic terms of the bonds
2. the total amount of the bonds
3. a description of property used as security
4. the repayment arrangements
5. the call provisions
6. details of the protective covenants |
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Term
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Definition
| the form of a bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner on record |
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Term
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Definition
the form of a bond issue in which the bond is issued without record of the owner’s name; payment is made to whoever holds the bond
Drawbacks – (1) difficult to recover if lost or stolen and (2) notification of important events is not possible directly to the bond holder |
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Term
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Definition
| secured by financial securities |
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Term
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Definition
| secured by real property, normally land or buildings (the document is called a mortgage trust indenture or trust deed) |
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Term
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Definition
| unsecured debt with original maturity over 10 years |
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Term
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Definition
| unsecured debt with original maturity less than 10 years |
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Term
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Definition
| The preference in position over other lenders (Ex – senior and junior bonds) |
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Term
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Definition
| an account managed by the bond trustee for early bond redemption |
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Term
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Definition
| an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity |
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Term
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Definition
| the amount by which the call price exceeds the par value of a bond |
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Term
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Definition
| a call provision prohibiting the company from redeeming a bond prior to a certain date |
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Term
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Definition
| a bond that, during a certain period, cannot be redeemed by the issuer |
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Term
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Definition
| a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interests |
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Term
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Definition
“thou shalt not” type of covenant
Examples
- the firm must limit the amount of dividends it pays according to some formula
- the from cannot pledge any assets to other lenders
- the firm cannot merge with another firm
- the firm cannot sell or ldase any major assets without approval by the lender
- the firm cannot issue additional long-term debt |
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Term
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Definition
“thou shalt” type of covenant
Examples
- the company must maintain its working capital at or above some specified minimum level
- the company must periodically furnish audited financial statements to the lender
- the firm must maintain any collateral or security in good condition |
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Term
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Definition
High Grade
Moody’s Aaa and S&P AAA – capacity to pay is extremely strong
Moody’s Aa and S&P AA – capacity to pay is very strong
Medium Grade
Moody’s A and S&P A – capacity to pay is strong, but more susceptible to changes in circumstances
Moody’s Baa and S&P BBB – capacity to pay is adequate, adverse conditions will have more impact on the firm’s ability to pay
Low Grade
Moody’s Ba, B, Caa and Ca
S&P BB, B, CCC, CC
Considered speculative with respect to capacity to pay. The “B” ratings are the lowest degree of speculation.
Very Low Grade
Moody’s C and S&P C – income bonds with no interest being paid
Moody’s D and S&P D – in default with principal and interest in arrears |
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Term
| Relationship between risk and return |
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Definition
r d = r f + risk premium
where,
rf = the compensation to investors for changes in expected inflation approximated by a 90 or 180-day T-Bill rate, and
Risk premium = the compensation for other risk attributes of a bond |
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Term
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Definition
| sensitivity of price changes to maturity changes |
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Term
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Definition
| ease in selling the bond to another party |
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Term
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Definition
| financial quality of the firm issuing the debt where outsiders look to S&P and Moody’s for guidance |
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