Term
| Corporate DEBT SECURITIES are issued by corporations to raise funds: |
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Definition
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Term
| Bonds are issued in the over-the-counter market |
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Definition
| may be listed on stock exchanges for secondary market trading. |
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Term
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Definition
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Term
| If a corporation goes bankrupt, |
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Definition
| Secured bondholders’ claims have priority over any general creditors’ claims. |
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Term
| Interest payments on bonds are usually made |
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Definition
| semiannually. Ever six-months twice a year. |
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Term
| The principal amount, known as the |
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Definition
| FACE VALUE, is paid at maturity.All bonds today have a face value of $1,000, and are sold in multiples of $1,000. |
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Term
| Zero-coupon bonds pay no interest during their life |
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Definition
| Paid all at one upon maturity. |
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Term
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Definition
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Term
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Definition
| an agreement between the issuer and the bondholders that is overseen by the trustee(Walking Tall Guy with a 2x4), who may take legal action if the issuer fails to live up to the promises (covenants) made to the bondholders. |
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Term
| The trustee( The Rock with a 2x4) |
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Definition
| has the responsibility to protect the bondholders. |
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Term
| Corporate bonds may be issued in one of two ways: |
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Definition
A)REGISTERED bonds
B)BOOK-ENTRY bonds |
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Term
| Corporate bonds may be issued in one of two ways: |
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Definition
A)REGISTERED bonds
B)BOOK-ENTRY bonds |
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Term
| The bond certificate must state the following four items: |
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Definition
A:
The name of the issuer
B:
The type of bond
C:
The interest rate
D:
The maturity date. |
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Term
| For good delivery all must be readable. |
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Definition
A:
The name of the issuer
B:
The type of bond
C:
The interest rate
D:
The maturity date. |
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Term
| If you cant read theses then they must go to the trustee for validation. |
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Definition
A:
The name of the issuer
B:
The type of bond
C:
The interest rate
D:
The maturity date. |
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Term
| Bonds are issued and traded in denominations of: |
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Definition
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Term
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Definition
| $10 (e.g., 98 would mean that the investor pays $980 for a $1,000 face value bond.) |
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Term
| EQUIPMENT TRUST CERTIFICATES(Crashing Planes and Trains): |
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Definition
| are bonds that are backed by rolling stock (movable equipment), such as railroad cars and airplanes. |
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Term
| “full faith and credit” of the issuing corporation. |
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Definition
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Term
| no:INCOME BONDS are also called ADJUSTMENT BONDS. |
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Definition
| Income bonds do not have to make interest payments unless there is sufficient income to the corporation |
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Term
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Definition
| the bond issuer is not paying interest to the bondholders of the corporation. |
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Term
| INCOME BONDS are also called ADJUSTMENT BONDS |
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Definition
| They trade flat:They do not trade with accrued interest because the corporation cannot assure bondholders that interest will be paid. |
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Term
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Definition
| can be repurchased by the issuer at a stated call price and date before maturity. |
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Term
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Definition
| Paying off outstanding bonds with the proceeds of a new issue is called |
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Term
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Definition
| Bonds are called “funded debt” and when refunding is occurring, the company is “funding the debt over again.” You may know this as “refinancing.” |
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Term
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Definition
| can be converted into shares of common stock if the bondholder chooses to do so. |
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Term
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Definition
| If the underlying stock has appreciated above the conversion price and the corporation calls the convertible bonds, holders of these bonds will convert them to stock instead of accepting the call price. |
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Term
| ANTIDILUTION CLAUSE.(IN the indenturement) |
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Definition
| To ensure that the company will always increase the conversion ratio and decrease the conversion price, the indenture of a convertible bond should contain an |
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Term
| NOMINAL YIELD, also known as the NOMINAL RATE, COUPON, or COUPON RATE, |
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Definition
| the amount of interest per $1,000 the bond pays every year to the bondholders, expressed as a percent. |
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Term
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Definition
| dividing the amount the investor receives each year in interest by the current market price. |
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Term
| The yield to maturity and the current yield |
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Definition
| move in the same direction. |
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Term
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Definition
| The yield to call will move in the same direction as the yield to maturity. |
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Term
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Definition
| When a bond trades for less than par (at a discount price), the yield to maturity will be higher than the nominal yield (a profit at maturity that must be taken into consideration). |
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Term
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Definition
| When a bond trades for more than par (at a premium price), the yield to maturity will be lower than the nominal yield (there will be a loss at maturity). |
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Term
| The current yield and the yield to maturity (basis) of a bond purchased at par will be equal |
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Definition
| the coupon rate (nominal yield). |
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Term
| Remember this regarding bond prices: High quality bonds = |
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Definition
| Higher price and lower yield. |
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Term
| In effect, when interest rates go up, bond prices go down. When interest rates go down, bond prices go up. |
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Definition
| This is known as the inverse relationship of bond yields and bond prices, or as we call it, the teeter-totter effect. |
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Term
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A premium bond, or a bond that is priced at a premium, |
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Definition
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Term
| A discount bond, or a bond that is priced at a discount, |
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Definition
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Term
| The Yellow Sheets are a daily list of all |
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Definition
| Over-the-Counter or OTC (bonds not listed on the NYSE), corporate bonds and are published by the National Quotation Bureau. |
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Term
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Definition
| (unlisted corporate bonds) |
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Term
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Definition
| (unlisted corporate stocks). |
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Term
| bond price is quoted in decimal form, it represents a percentage of par that translates into dollars and cents |
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Definition
| For example, a bond quote of 96.55 means the bond is trading at 96.55% of $1,000, meaning the price of this bond is $965.50 |
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Term
| To convert a decimal quote to the price of the bond,just move the decimal to the right one decimal place. |
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Definition
| 96.55% is 96_._ _ which is 965.50 is the quote in dollars |
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Term
When investors wish to purchase a bond, the representative gives them a quote and states that there will be interest as well.
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The quote for the bond may be stated as “the bond is priced at 96.55 and interest.” |
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Definition
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This means that the price is $965.50 per $1000 bond, plus accrued interest. |
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Term
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Definition
| If the bond is trading without interest because the issuer may be in default, the bond is said to be “trading flat.”“the bond is priced at 96.55 flat.” |
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Term
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Definition
| This means that the price is $965.50 per $1000 bond, but does not include accrued interest because the issuer is not presently paying any interest payments. |
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Term
| CONVERTIBLE BONDS are convertible into shares of stock of the corporation |
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Definition
| at any time after the bonds are issued up until the maturity date or the date the bonds are called, but only at the direction of the investors. |
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Term
| Convertible bonds are convertible into a set number of shares of common stock, |
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Definition
| the CONVERSION RATIO, at a set CONVERSION PRICE. |
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Term
| A convertible bond arbitrage can only happen |
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Definition
1)when the bond is at a discount to stock parity.
2)the stock is at a premium to bond parity. |
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Term
| The CONVERSION PRICE is the price at which |
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Definition
| the bond can be converted into stock. |
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Term
| The conversion price is divided into 1,000, the face value of the bond, |
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Definition
| to determine the number of shares for each bond (called the CONVERSION RATIO). 50 is the conversion price/1000=20 each bond give you 20 shares of stock. |
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Term
| If the conversion price needs to be known, just divide the conversion ratio into 1,000 |
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Definition
| the face value of the bond, to arrive at the conversion price. |
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Term
| Parity is the price at which both the value of the bond and the equivalent converted stock are equal in value. |
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Definition
| The first step is to determine the conversion ratio, and the second step is to determine the parity price. |
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Term
| The first step is to determine the conversion ratio, and the second step is to determine the parity price. |
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Definition
The formula is: # x $ = bond price.
NUMBER OF SHARES × SHARE PRICE = BOND PRICE |
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Term
| second step is to determine the parity price. |
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Definition
Determine this number Enter conversion price = 1,000
Enter resulting number × New price = or new price
The formula is:
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NUMBER OF SHARES × SHARE PRICE = BOND PRICE
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Determine this number Enter conversion price = 1,000
Enter resulting number × New price = or new price |
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Term
| Reverse convertible bonds are short-term, high-yielding debt issues that could turn into stock or cash |
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Definition
| are worth far less than the original purchase price of the bond |
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Term
| Issuers of reverse convertible bonds have the right, but not the obligation, to convert the bonds at a pre-set date into: |
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Definition
A specified number of shares of common stock of another company
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Bonds of a specified company
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Cash |
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Term
| Interest for corporate bonds and all other bonds (except government bonds) is computed using 30-day months and a 360-day year. |
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Definition
To determine the total days of interest owed, use the formula below,
TRADE DAY
+ 3 BUSINESS DAYS (Plus 2 more for a weekend between trade and settlement dates)
- PREVIOUS INTEREST DATE
= (NUMBER OF MONTHS × 30 PLUS NUMBER OF DAYS)
Or
= TOTAL DAYS OF ACCRUED INTEREST OWED |
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Term
| U.S. money-center commercial banks compute interest charges on short-term secured corporate loans the rate charged coporation to loan. |
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Definition
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Term
| The CALL RATE is the interest rate that banks charge broker/dealers for money that will be lent to customers by the broker/dealers |
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Definition
| for the purchase of securities. |
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Term
| member banks get this rate: |
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Definition
| The DISCOUNT RATE is the rate that the Federal Bank (“the Fed”) charges for loans |
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Term
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Definition
| The FEDERAL FUNDS RATE is the rate that one bank charges another bank for overnight lending to meet the Fed’s reserve requirement. |
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Term
| Utility companies are always considered leveraged companies |
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Definition
| because they almost always have a large amount of debt in their capitalization. |
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Term
| Leveraged companies are highly affected by interest rate changes |
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Definition
| because the amount of interest they must pay increases as interest rates increase. |
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Term
| DEBT SERVICE = PRINCIPAL + INTEREST |
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Definition
| DEBT SERVICE/INTEREST = PRINCIPAL |
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Term
| A money market instrument is any high-quality, |
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Definition
| debt security that will mature in one year or less. |
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Term
The rating agencies:Standard and Poor’s Rating Service
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Moody’s Rating Service |
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Definition
Fitch’s Rating Service
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Best’s Rating Service, the one rating company that rates insurance companies instead of bonds |
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Term
NEGOTIABLE CERTIFICATES OF DEPOSIT (CDs)
They are issued in amounts from $100,000 to $1,000,000 or more. |
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Definition
| are bank-issued, short-term debt instruments that are negotiable in the secondary market and can be sold if the holder needs the money. |
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Term
| Step-up CDs are negotiable certificates of deposit, |
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Definition
| issued by a bank, that can be bought and sold between two investors. |
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Term
Step-up CDs:
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Have market risk, since they can be bought and sold between investors, and as interest rates change, so does their value.
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Have a fixed rate of interest for a period of time, and then it rises three or four times during the life of the CD. |
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Definition
Are issued to investors who want the safety of a bank CD, but want the rates to rise, as they are expecting the same rise in rates from other debt securities.
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Are purchased not only by individuals, but by institutional accounts as well.
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Are issued in $1,000 increments up to $99,000 and cannot be redeemed to the issuing bank. |
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Term
| BANKER’S ACCEPTANCES are short-term notes “used to facilitate foreign trade in the United States.” |
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Definition
| The banker’s acceptances are a collateralized time deposit, meaning that they are issued for a period of time, usually 90 to 180 days, and are technically backed by the collateral for which they were issued. |
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Term
| COMMERCIAL PAPER is an unsecured note issued by a corporation to raise cash |
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Definition
| The maturity is for a maximum of 270 days |
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Term
The main players in repurchase agreements are:
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Broker/dealers
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Corporations |
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Definition
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Term
Overnight repurchase agreements:
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Have no interest rate risk |
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Definition
Have no market risk
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Pay interest equal to the Fed funds rate |
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Term
| AUCTION RATE SECURITIES are debt securities (either corporate or municipal) or preferred stock |
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Definition
| that have their interest rates change periodically. |
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Term
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Most ARS are re-set at 7-, 14-, 28-, or 35-day intervals. |
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Definition
| Some have re-set periods that go out to 91 days — semiannual or annual for the next auction. |
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Term
| DUTCH AUCTION selling method |
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Definition
| For ARS auction rate securities |
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Term
| all ARS bidders will be awarded their securities at one rate: |
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Definition
| This is called the CLEARING RATE for ARS |
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Term
| If there are not enough bids to cover all of the securities being offered, |
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Definition
| the offering is called a FAILED AUCTION. |
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Term
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Definition
| not all of the existing security holders are able to sell all of their securities. When this occurs, all the sellers are forced to hold on to their securities and receive the maximum rate set by the issuer — usually a multiple of LIBOR. Holders of auction rate securities are not allowed to sell or put the securities back to the issuer; they can only hope to sell the securities in the next re-set auction or hope the issuer calls the securities in at the time the bond is maturing. |
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Term
| People who hold ARS can only sell them in the next re-set offering, |
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Definition
| or will be required to hold them, not knowing if they will ever be able to resell. |
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Term
| For this reason, ARS are NOT a liquid investment, |
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Definition
| although they will still earn their “dividend rate” at the end of the re-set period |
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Term
| A failed auction can be caused by one of the following: |
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Definition
There are not enough bids from new investors to cover the securities at the auction offering.
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The bid is above the maximum as set by the issuer. |
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Term
ARS has three types of orders:
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Buy — A new order to purchase some of the offering |
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Definition
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Sell — An order to sell at the coming re-set bidding
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Hold —The investor is keeping the ARS, regardless of the rate |
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Term
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Definition
are large deposits of U.S. dollars in foreign depositories (banks).
Often, because of the stability of the U.S. dollar, these deposits are used to fund international foreign trade. |
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Term
| All interest and principal payments are calculated |
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Definition
| in U.S. dollars. Issuers of Eurodollar bonds include foreign and U.S. corporations and even U.S. state and municipal governments (not, however, the U.S. government). |
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Term
| Interest on corporate bonds is subject to both |
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Definition
| federal income tax and state income tax. |
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Term
| Of the three types of bonds issued — corporate, government, and municipal bonds |
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Definition
| Corporate bonds pay the highest interest rates on equal quality bonds due to this taxation |
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Term
| The bondholder could have ordinary income, if the bond was purchased at a discount, |
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Definition
| or a deduction from each year’s interest, if purchased at a premium. |
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Term
| The holder of a zero-coupon bond has no capital gain if the bond is held to maturity. |
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Definition
| If a zero-coupon bond is held for one year and sold above its original value, the investor will have ordinary income and a capital gain. |
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Term
| value is known as the compound accreted value, or CAV. |
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Definition
| the time the bond is held, it will have a value |
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Term
| over the time the bond is held. |
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Definition
| The CAV is determined by accreting the zero-coupon bond based on its principal, compounded over the time the bond is held.The aspects that are needed are the dated date (the date that the interest starts to accrue), the maturity date, and the time that the bond has been held. |
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Term
| The CAV continually increases as a result of |
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Definition
| of what would be the accrued interest. |
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