Chapter 8

Equipment Bond

A bond that a railroad issues in order to purchase trains and anything else that moves on the railway. The bond is secured by the assets purchased; that is, if coupon or other payments are not made, bondholders may confiscate and sell the equipment financed by the bond.

Collateral Trust Bond

A collateral trust bond is a bond that is secured by a financial asset - such as stock or other bonds - that is deposited and held by a trustee for the holders of the bond.

Public Sale and Underwriting

An underwriter is a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter's distribution network. Underwriters generally receive underwriting fees from their issuing clients, but they also can earn profits when selling the underwritten shares to investors.

Convertible and Non-convertible

Convertible bonds are bonds that can be converted into share of common stock at the discretion of the bondholder. If the stock price rises above a percent level, usually 15 to 20 percent than the bondholders can convert the bond into equity.

Bearer Bonds and Registered Bond

Corporate bonds can be bearer bonds, for which couponds are attached that the holder presents for payment when they come due, or registered bonds, for which the owner is recorded and payment due Is mailed ot the owner. Corporate bonds are usually issued in denomination of $1,000 and are coupon-paying bonds paying interest semiannually; their coupon payments are fully table to the investor

Subordinated Debenture

Corporate bonds can diffe in ways othe than security. The debentures can be senior debt, giving the bondholders first priority to the firm's assets (after secured claims are satisfied) in the event of default, or

Senior Mortgage Bond

Corporate bonds can differ in ways other than security. The debentures can be senior debt, giving the bondholders first priority to the firm's assets (after secured claims are satisfied) in the even of default

Debenture Bonds

If no assets are pledged, the bonds are secured only by the firm's potential to generate cash flow then they are called debentures.

BREAKING DOWN 'Collateral Trust Bond'

If the issuing company were to default on the debt obligation, the debt holders would receive the securities held in trust, like collateral for a loan. For example, say Company A issues a collateral trust bond, and as collateral for the bond it includes the right to Company A shares held by a trust company. If Company A were to default on the bond payments, the bondholders would be entitled to the shares held in trust.

Maturity: Term and Serial Issues

Most corporate bonds are term bonds, which means that all of the bonds that comprise a particular issue mature on a single date.

Securitized Credit Instruments

Securitization involves setting up a trust that buys a large number of loans of similar types. Separate claims on the principal and interest payments on the loans can be sold to different people.

TIPS (Treasury Inflation Protection Securities)

TIPS were first issued in Jannuary 1997. TIPS notes have original maturities of 5 and 10 years, and TIPS bondshave original maturities of 20 and 30 years. Principal amount on which the coupon payments are based changes as the inflation rate changes.

Industrial Development Revenue Bonds (IDRs)

The purpose of the law is to give local governments a tool for enticing new industries into their areas or persuading them to expand where they are instead of opening office elsewhere. Act 9 allows two methods of handling the bond issues. Under one method, local governments serve as conduits for issuing industrial revenue bonds and "own" the property purchased with the bonds as collateral. The governments then lease the property back to the industry, with the lease payments going to the bond trustee to pay off the bonds instead of to the city. When the indebtedness is paid off, the industry then owns the property

STRIPS (Separate Trading of Registered Interest and Principal)

Treasury security that has been separated into its component parts: Each interest payment and the principal payment become separate zero-coupon security. Strips must be sold in multiples of $1,000 with a minimum face value of $1,000. The treasury designates whether a particular security issue is available for strippig.

After Tax Yield Considerations

When investors buy bonds, they should always make a comparison between similar taxable and exempt securities to see which option has the highest after-tax yield to the investors.

Bond Indenture

a legal contract that states the rights, privileges, and obligations of the bond issuer and the bondholder.

Housing Bonds

contains a range of maturity dates rather than all of the bonds in the issue having the same maturity date.

Callable and Non-callable

d

Credit Enhancement

d

General Obligation Bonds or revenue bonds (Full Faith and Credit Bonds or GOs)-

general obligation bonds are backed by the full faith and credit of the power to tax. Of the issuing political entity; there are no assets so if the county defaults the court orders the county to raise taxes so it can pay for the bound.

Secondary Market

in general the secondary market for municipal bonds is thin and is primarily an over-the-counter market. Although the bonds of some large, well-know municipalities do have active secondary markets, small local issues are traded infrequently, with commercial banks and local brokerage houses the market.

Junior, Mortgage, Bond

in which bondholders claims to the company's assets rank behind senior debt.

Tax Treatment of Municipal Bonds

municipal securities can be distinguished from other types of securities by the fact that coupon interest payments are exempt from US federal income tax. Many states also exempt munis issues in their home states.

Primary Market

primary market for municipal bonds has a large number of relatively small bonds issues. These bonds tend to be underwritten by small regional underwriters in the immediate area of the issuing municipality.

Sinking Fund

provision requires that the bond issuer provide funds to a trustee to retire a specific dollar amount (face amount) of bonds each year.

Direct or Private Placement

requires publicly sold securities to be registered with the SEC. Intended to protect individual investors by forcing firms to disclose a modicum of information about their securities.

T-Notes and T-Bonds

they are similar to t-bills in that the US Government backs them. They are different in that they have maturities greater than 1 year. T-Notes have on original maturity of 1 to 10 years, and bonds have an original maturity of more than 10 years. a. Currently, the standard maturities are 2, 3, 5, 7, and 10 years for notes b. 30 years for the bonds