Series 6-Module 2-Corporate Securities

Serial Bond

Bonds mature sequentially. A bond issue in which a portion of the outstanding bonds matures at regular intervals until eventually all of the bonds have matured. As they mature gradually over a period of years, these bonds are used to finance a project providing regular, level or predictable income streams. Serial bonds are also used to finance projects with regular, level debt payments such as residential developments.

Convertable

Can be converted into common stock.

Callable

Can be retired by issuer prior to the maturity date.

Coupon, Nominal, Stated Yield

Fixed rate (Coupon * Par = Annual Interest) with interest paid semi-annually

Debt Financing

Founded debt. When a firm raises money for working capital or capital expenditures by selling bonds. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

Bond in Default

Trades flat.

Credit or Default Risk

Measured by rating agencies- Moody's, Standard & Poor's

Debenture

Unsecured Bond. A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.

Priced at Discount

Value < $1,000.00

Priced at Premium

Value > $1,000.00

Point

1% of par value. Thus any point of the bond represents $10.00.

Price Quotations on Bonds

Bond prices are quoted as a percentage of their $1,000.00 par value. Corporate bonds trade in eights (93 5/8) Municipal bonds trade in eights (107 3/4) Government and agency bonds trade in thirty-seconds, not reduced to the simplest form (103.24)

Series Bond

Bonds issued sequentially.

Current Yield

"Right now" return. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.

Priced at Par

$1,000.00

Factors effecting Reinvestment Risk

1. Maturity of the bond - The longer the maturity of the bond, the higher the likelihood that interest rates will be lower than they were at the time of the bond purchase. 2. Interest rate on the bond - The higher the interest rate, the bigger the coupon payments that have to be reinvested, and consequently the reinvestment risk

Factors effecting Coupon Rate

1. Prevailing interest rates 2. The borrower's credit history

Factors effecting Volatility

1. length of time to maturity 2. The coupon rate of the bond High coupon rate= cash one receives every six months dampens the price fluctuations low coupon rate= receiving less cash results in wider price fluctuations *bond with highest volatility=zero-coupon bond with a long term yield to maturity (YTM)

Corporate Securities

A financial instrument that represents: an ownership position in a publicly-traded corporation (stock). A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer. Securities are typically divided into debt securities and equities. A debt security is a type of security that represents money that is borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock and collateralized securities (such as CDOs and CMOs). Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains.

Term Bond

All bonds mature on the same day. This means the issuer of the bond can redeem it at a predetermined price, at specific times before the bond matures.A term bond is the opposite of a serial bond, which has various maturity schedules at regular intervals until the issue is retired.

Registered

Certificate has owner's name.

Corporate Bond

Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt.

Maturity Date

Date the principle amount must be paid.

Investment Grades

Either investment grade (AAA,AA,A,Aaa,Aa) or junk (BB, B, Baa, Ba)

Par Value

Face amount of the instrument- $1,000.00.

Coupon or Nominal Rate

Interest rate of the loan.

Subordinated

Lower priority or claim. A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. In the case of default, creditors with subordinated debt wouldn't get paid out until after the senior debtholders were paid in full. Therefore, subordinated debt is more risky than unsubordinated debt.

Zero Coupon Bond

Pays no current interest, purchased at discount, matures at par. A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Purchasing Power/Inflation Risk

Present in any fixed income security.

REFunding

REFinancing.

Sinking Fund

Required annual redemptions.

Equipment Trust Certificate

Secured by equipment. A debt instrument that allows a company to take possession of an asset and pay for it over time. The debt issue is secured by the equipment or physical assets, as the title for the equipment is held in trust for the holders of the issue. When the debt is paid off, the equipment becomes the property of the issuer, as the title is transferred to the company. Nowadays, equipment trust certificates are used to finance containers used for shipping and offshore businesses.

Mortgage Bond

Secured by real estate. A bond secured by a mortgage on one or more assets. Mortgage bonds offer the investor a great deal of protection in that the principal is secured by a valuable asset that could theoretically be sold off to cover the debt. However, because of this inherent safety, the average mortgage bond tends to yield a lower rate of return than traditional corporate bonds that are backed only by the corporation's promise and ability to pay.

Collateral Trust Certificate

Secured by securities. 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.

Yield to Maturity (YTM)

Takes time into account, sequence of yields is always the same. The rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a long-term bond yield expressed as an annual rate. The YTM calculation takes into account the bond's current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupon payments are reinvested at the same rate as the bond's current yield. YTM is a complex but accurate calculation of a bond's return that helps investors compare bonds with different maturities and coupons.It factors in the time value of money, whereas a simple current yield calculation does not. YTM is the interest rate an investor would earn by investing every coupon payment from the bond at a constant interest rate until the bond's maturity date. The present value of all of these future cash flows equals the bond's market price.

Reinvestment Risk

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining. Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

Effects of Interest Rates of Bonds

There is an inverse relationship of price and interest rate movement.

Interest Rate Risk

can be minimized by preferring short-term bonds. Think pencil shake.

Redemption

is paying off with surplus funds.