SIE Ch 2 Section 4: Types of Corporate Bonds

Junk bonds/High-Yield Bonds

bonds issued by companies without a long track record of sales, and earnings; or companies that have questionable credit strength.

Fallen Angels

bonds that were issued as "investment grade bonds (angels)" but have been downgraded to a Junk Bond rating

Parity Bonds

bonds which are issued that have equal claim or rights as other bonds which were previously issued (aka open end mtg bonds)

Closed End Mortgage Bonds

the property used to secure the loan cannot be used as collateral to secure other future loans, unless the subsequent loan(s) are lesser in claim (i.e. second or third mtg bond)

A quote for a Zero Coupon Bond is generally identified with

"ZR" in the quote Ex: ABC zr 27 means this is an ABC zero coupon bond maturing in 2027

Guaranteed Bonds

bonds guaranteed by a company other than the company that issued them (i.e. a parent company might guarantee the debt of a subsidiary company)

The 3 main types of Mortgage Bonds are

1. closed end mortgage bonds 2. open end mortgage bonds 3. general mortgage bonds

Secured Bonds - There are a number of different types of corporate bonds. These first 5 are more conservating investments in that they are secured by a guarantee or collateral of some sort

1. guaranteed bonds 2. mortgage bond 3. equipment trust certificate 4. collateral trust certificate 5. parity bonds

With Income or Adjustment Bonds

1. principal is still due at maturity 2. these bonds normally trade "flat" - aka without accrued interest 3. called adjustment bonds when used in a corporate reorganization 4. considered to be a risky investment

When calculating the amount of accretion on a Zero Coupon Bond, one would use the

1. purchase date 2. purchase price 3. dated date 4. maturity date **But would NOT use the current market value of the zero coupon bond

Junk bonds/High-Yield Bonds - These bonds are rated

BB or lower, or have not been ralted at all by bond rating services

Zero Coupon Bonds are the most

VOLATILE OF ALL FIXED INCOME SECURITIES; because they are issued at a discount, do not pay interest semi annually, and accrete value from imputed interest which isnt paid out until maturity

Subordinate Debenture

a debenture bond which holds a lesser or "junior" claim than other debenture bonds and thus would be paid only after higher level debenture claims had been satisfied

Zero Coupon Bonds increase in value by means of

accretion

Zero Coupon Bonds are purchased by investors seeking

accumulation of capital. Investors will often use zero coupon bonds as a means of accumulating capital for an upcoming project or goal (i.e. parent might purchase these bonds which mature when their child will begin college)

Debenture

an instrument of debt backed by the "good faith and credit" of the issuing corporation only. They are unsecured debts = no collateral

Collateral Trust Certificate

an instrument of debt issued by a company that uses securities (stocks and/or bonds) of other corporations that the issuer owns as collateral. The securities used as collateral are placed on deposit with a trustee. Collateral trust certificates are generally issued by parent corporations that use the securities of a subsidiary as collateral (wholly owned)

Mortgage Bond

an instrument of debt secured by a mortgage on the real property owned by the issuing corporation. Mortgage Bonds are the largest type of secured securities issued by corporations

Interest or Coupon bearing bonds offer more price stability becausethey

are normally issued at or near par value, pay interest semi annually, and their market value does not reflect any imputed interest or accrued interest

Zero Coupon Bonds are issued at a

discount. The discount is representative of the amount of interest that the bond would pay, but no interest is paid over the life of the bond

Junk bonds/High-Yield Bonds - Are sometimes used to

finance corporate takeovers

Low quality bonds generally have

higher yields and lower market prices

Junk bonds/High-Yield Bonds - Usually have

higher yields than Investment Grade Bonds

Equipment Trust Certificate

instrument of debt that is generally issued by transportation companies to purchase new equipment (i.e. the rolling stock of the issue corporation such as railroad cars, shipping containers, airplanes, trucks, etc). A trustee holds the title to the equipment until the bonds are completely paid at maturity. In the event of a default on the bonds, bondholders have first rights to the titles of the equipment. These bonds are usually not callable, normally issued in Serial form and rarely ever default

Junk bonds/High-Yield Bonds - Also called "high-yield bonds"

issuers and holders prefer this term the Junk Bond

High quality bonds have

lower yields and higher market prices

Accrued interest accumulated on

normal bonds which pay interest semi-annually.

Debentures (unsecured debt) and Subordinated Debentures are

not secured by collateral or other types of assets. These bonds can still be safe but carry less safety than those previously listed due to the lack of guarantee or collateral

Income or Adjustment Bonds

often issued by companies in financial difficulty trying to avoid bankruptcy. They promise to pay interest only if they have sufficient earnings and the Board of Directors declares that interest will be paid

Zero Coupon Bonds at maturity pay the investor

one lump sum which includes the investors initial investment plus imputed interest.

General Mortgage Bonds

pledges all mortgageable properties of a corporation as collateral but does not name any specific lots

Open End Mortgage Bonds

property can be used to secure subsequent loans and all debts hold equal claim, this creates more risk and generally a higher yield

Accretion

represents the amount of "imputed interest" (or implied interest) which has accumulated on a bond purchased at a discount

Income, Junk, and Fallen Angel bonds are considered

risky investments in that they represent the lack of a solid credit record or the financial distress of the issuer. Therefore, these bonds will generally offer a higher coupon rate

Zero Coupon Bonds do not pay

semi-annual interest and therefore do not have accrued interest

Zero Coupon Bonds do not pay

semi-annual interest, so no accrued interest would be paid at the time the bond was purchase/sold.

Zero Coupon Bonds

sold at deep discounts and pay no interest while the bonds are outstanding

Zero Coupon Bonds produce "Phantom Income" as bondholders are

taxed annually based on the increased value of the security even though they have received no actual income

Junk bonds/High-Yield Bonds - Are usually more

volatile than Investment Grade Bonds

Interest rates have a more dramatic effect on

zero coupon bonds