IAII CH 14

Bearer bonds

A fixed-income instrument that is owned by whoever is holding it, rather than having a registered owner. Coupons representing interest payments are likely to be physically attached to the security and it is the bondholder's responsibility to submit the coupons for payment.

Prospectus

A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.

Sinking fund debentures

A sinking fund debenture is one whereby repayment is secured by periodic payments by the corporation into a sinking fund, an amount of money made up of corporate assets and earnings that are set aside for the repayment of designated debentures and long-term debts

Subordinated debenture

An exception to the debenture bonds, which is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied.

Mortgage bond

Backed by a lien on specified real estate owned by the issuer. Commands a lower interest rate because it is considered to be less risky.

Term bonds

Bonds from the same issue that share the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date than the other issued bonds. A call feature, or call provision, is an agreement that bond issuers make with buyers. This agreement is called an "indenture", which is the schedule and the price of redemptions, plus the maturity dates.

Convertible bonds

bonds for which bondholders have the option to convert the bonds into shares of stock

Coupon bonds

name of the owner was not registered; the holder actually clipped an attached coupon and redeemed it in accordance with instructions on the indenture, Term was developed years ago when the owner of a coupon bond would collect interest by actually clipping an attached coupon and redeemed the interest with instructions in the indenture. We still use the term coupon rate in reference to the stated interest rate on bonds.

Trustee

person who accepts employer contributions, invests the contributions, accumulates the earnings on the investments, and pays benefits from the plan assets to retired employees or their beneficiaries

Detachable stock purchase warrants

the investor has the option to purchase a stated number of shares of common stock a a specified option price, within a given period of time

Debt issue cost

the issuing company will incur costs in connection with issuing bonds or notes, such as legal and accounting fees and printing costs, in addition to registration and underwriting fees

Troubled debt restructuring

the original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor (borrower)

Bonds

a form of debt consisting of separable units (bonds) that obligates the issuing corporation to repay a stated amount at a specified maturity date and to pay interest to bondholders between the issue date and maturity

Redeemable bonds

A bond that the issuer has the right to redeem prior to its maturity date, under certain conditions. When issued, the bond will explain when it can be redeemed and what the price will be.

Registered bonds

A bond whose owner is registered with the bond's issuer. The owner's name and contact information is recorded and kept on file with the company, allowing it to pay the bond's coupon payment to the appropriate person. If the bond is in physical form, the owner's name is printed on the certificate.

Junk bonds

Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them.

Serial bonds

More structured and less popular way to retire bonds on a piece meal basis. Serial bonds are retired in installments during all or part of the life of the issue. Each bond has its own specified maturity date. So for a typical 30-year serial issue, 25 to 30 separate maturity dates might be assigned to specific portions of the bond issue.

Debenture bond

Most corporate bonds are debenture bonds which are secured only by the "full faith and credit" of the issuing corporation. No specific assets are pledged as security. Investors in debentures usually have the same standing as the firms other creditors. So in case of bankruptcy, debenture holders and other general creditors would be treated equally.

Zero-coupon bonds

Pays no interest, instead it offers a return in the form of a deep discount from the face amount. An advantage of issuing zero-coupon bonds is that the corporation can deduct for tax purposes the annual interest expense but has no related ash outflow until the bonds mature.

Callable

The call feature allows the issuing company to buy back, or call, outstanding bonds from bondholders before their scheduled maturity date. Affords the company some protection against being stuck with relatively high cost debt in the event interest rates fall during the period before maturity, The call price must be pre-specified and often exceeds the bond's face amount (a call premium), sometimes declining as maturity is approached.

Early extinguishment of debt

debt is retired prior to its scheduled maturity date

Bond indenture

document that describes specific promises made to bondholders, The bond indenture is held by a trustee, usually a commercial bank or other financial institution, appointed by the issuing firm to represent the rights of the bondholders. If the company fails to live up to the terms of the bond indenture, the trustee may bring legal action against the company on behalf of the bondholders.

Implicit rate of interest

rate implicit in the agreement

Effective interest method

recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt