CHAPTER 9 : BOND But not good for investors if rates
decline after issuance.
Bond? A long-term debt instrument in which Types of Bonds a borrower agrees to make payments Mortgage bonds of principal and interest, on specific Debentures dates, to the holders of the bond Subordinated debentures Investment-grade bonds Key featured of bond? Junk bonds Par value: face amount of the bond, which is paid at maturity Coupon interest rate: stated interest rate (generally fixed) paid by the issuer. Factors Affecting Default Risk and Bond Multiply by par value to get dollar Ratings payment of interest. Maturity date: years until the bond 1. Financial performance must be repaid. Debt ratio Issue date: when the bond was issued. TIE ratio Yield to maturity: rate of return Current ratio earned on a bond held until maturity (also called the promised yield). 2. qualitative factors: Bond contract terms Effect of a Call Provision Secured vs. unsecured debt Allows issuer to refund the bond issue Senior vs. subordinated debt if rates decline (helps the issuer, but Guarantee and sinking fund provisions hurts the investor). Debt maturity Borrowers are willing to pay more, and lenders require more, for callable Other Factors Affecting Default Risk bonds. Most bonds have a deferred call and a Miscellaneous qualitative factors declining call premium. Earnings stability Regulatory environment What is a sinking fund? Potential antitrust or product Provision to pay off a loan over its life liabilities rather than all at maturity. Pension liabilities Similar to amortization on a term Potential labor problem loan. Reduces risk to investor, shortens average maturity. CHAPTER 4: ANALYSIS OF FINANCIAL STATEMENT