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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

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