Chapter 7: Bonds

Sinking Bond

a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money (buy back bonds)

Trustee

- An individual or organization which holds or manages and invests assets for the benefit of another. A group of 21 men who established the colony of Georgia. Of the group, only one, James Oglethorpe, came to the colony.

Convertible Bonds

-Bonds that can be converted into common stock at the bondholder's option -Bonds that are convertible into other securities of the corporation for a specified time after issuance.

Putable Bond

A bond that allows the investor to sell the bond back to the issuer, prior to maturity, at a price that is specified at the time that the bond is issued. -Redeemable at par value

Debenture

A bond that is not secured by collateral or guarantees. Unsecured bonds which provide no collateral for bondholders in the event of default. Debentures typically carry a higher interest rate than if the same bonds were issued with security

Income Bond

A bond that pays interest only if it is earned.

Zero Coupon Bond

A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation

Registered Bond

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. Most registered bonds are now tracked electronically, using computers to record owners' information.

Bearer Bond

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. As with registered bonds, bearer bonds are negotiable instruments with a stated maturity date and coupon interest rate.

Bond Covenant

A legally binding term of an agreement between a bond issuer and a bond holder. Bond covenants are designed to protect the interests of both parties. Negative or restrictive covenants forbid the issuer from undertaking certain activities; positive or affirmative covenants require the issuer to meet specific requirements. ---Possible bond covenants might include restrictions on the issuer's ability to take on additional debt, requirements that the issuer provide audited financial statements to bond holders and limitations on the issuer's ability to make new capital investments. When an issuer violates a bond covenant, it is considered to be in technical default. A common penalty for violating a bond covenant is the downgrading of a bond's rating, which could make it less attractive to investors and increase the issuer's borrowing costs.

Callable Bond

Bond in which the issuer has the right to call the bond away from the investor for a price determined at the time that the bond is issued. A bond that can be redeemed by the issuer at any time prior to its maturity. Usually a premium is paid to the bondholder when the bond is called. -The main cause of a call is a decline in interest rates since the first date of issue. The issuer would likely call the current bonds and distribute new bonds at a lower interest rate. Unfortunately, these types of bonds pose considerable interest rate risk to bondholders. Also, since the issuer can call the bond at any time before maturity, there is also uncertainty as to when the call (and corresponding interest rate exposure) will occur.

Subordinated Debenture

a bond that is backed by the credit of the issuer but not by any specific collateral

Industrial Revenue Bond

a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money -Usually at the municipal level

Junk Bond

High-risk securities that have low ratings but produce high yields.

Bond Rating

Method of evaluating the possibility of default by a bond issuer. S&P's, Moody's Investors Service, and Fitch's Investors Service analyze the financial strength of each bond's issuer, whether a corporation or a government body. Their ratings range from AAA (highly unlikely to default) to D (in default). Bonds rated BB or below are not INVESTMENT GRADE.

Mortage Bond

bonds on which specific assets are pleged as a guarantee that the principal and intersest will be paid according to the terms specified on the bonds.

Floating Rate Bond

debt instrument with a variable interest rate. Also known as a "floater" or "FRN," a floating rate note's interest rate is tied to a benchmark such as the U.S. Treasury bill rate, LIBOR, the fed funds or the prime rate. Floaters are mainly issued by financial institutions and governments, and they typically have a two- to five-year term to maturity. -Floating rate notes (FRNs) make up a significant component of the U.S. investment-grade bond market, and they tend to become more popular when interest rates are expected to increase. Compared to fixed-rate debt instruments, floaters protect investors against a rise in interest rates. Because interest rates have an inverse relationship with bond prices, a fixed-rate note's market price will drop if interest rates increase. FRNs, however, carry lower yields than fixed notes of the same maturity. They also have unpredictable coupon payments, though if the note has a cap and/or a floor, the investor will know the maximum and/or minimum interest rate the note might pay.

Indenture

formal agreement between the issuer of bonds and the bondholders as to terms of the debt