afinan1 1st sem 11 - 12 By: Mrs. Belen Apostol Corporate Bonds By: Mrs. Belen Apostol by: Mrs. Belen Apostol

afinan1 1st sem 11 - 12 Corporate Bonds Bonds – long term debt of a firm or the government set forth in writing and made under seal. - it does not represent equity capital, but they are long-term liabilities of the company. - a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates, to the holder of the bond. - unlike long-term loans, it is generally advertised, offered to the public and sold to many investors a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. by: Mrs. Belen Apostol

Kinds of Bonds Government Bonds – issued by the government to finance its activities Corporate Bonds – issued by private corporations to finance their long-term funding requirements.

Bonds as Distinguished from Stocks afinan1 1st sem 11 - 12 Bonds as Distinguished from Stocks Bonds Stocks Debt Instrument Instrument of Ownership Bondholders have priority over stockholders when payments are made by the company Stockholders shall wait for the bondholders to be paid Interest payments due to bonds are fixed Dividends are contingent upon earnings and must be declared by the board of directors Bonds have specific maturity date, at which time, repayment of principal is due Stocks are instruments of permanent capital financing and does not have maturity dates Bondholders have no vote and no influence on the management of the firm, except when provisions of the bond and the indenture agreement are not met Stockholders (common stocks) have the right to vote (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. by: Mrs. Belen Apostol

Alternative Ways of Bond Issuance afinan1 1st sem 11 - 12 Alternative Ways of Bond Issuance Bonds are issued in the following ways: Public Offering – selling of corporate bonds to the general public through investment bankers. The investment banker provides assistance in the issuance of bonds by: 1. helping the firm determine the size of the issue and the types of bonds to be issued 2. establishing the selling price 3. selling the issue The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). The word "underwriter" is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment. Read more: http://www.investopedia.com/terms/u/underwriting.asp#ixzz1YRUeTdG2 by: Mrs. Belen Apostol

Alternative Ways of Bond Issuance Bonds are issued in the following ways: 2. Private placement – sale of bonds directly to an institution and is a private agreement between the issuing company and the financial institution without public examination. Advantages 1. the issue can be tailor-made to fit the needs of the issuing firm, as well as the investing firm. 2. the issues does not have to be registered 3. there are no underwriting fees paid by the issuing firm.

Classes of Bonds Three general types By type of security By manner of participation in earnings By method of retirement or repayment

Classification of Bonds as to Type of Security Earnings and general unpledged assets of issuing company (Debentures) Earnings of issuing company plus pledge of specific property (mortgage bonds). This is further classified as follows: a. Real estate mortgages (senior & junior liens) i. closed-end issues ii. Open-end issues b. Chattel mortgages 3. All or some of original security plus general credit of another company which may be: a. assumed bonds b. guaranteed bonds 4. Combined earnings of allied companies plus collateral protection in some cases (joint bonds).

Classification of Bonds as to Type of Security Debenture bonds – general credit bonds not secured by specific property. The earning power of the issuing corporation provides the protection to the debenture bondholder. The claim of debenture bondholders is superior to any stockholder regarding unpledged property of the issuing corporation.

Classification of Bonds as to Type of Security afinan1 1st sem 11 - 12 Classification of Bonds as to Type of Security Mortgage bonds – secured by a lien on specifically named property such as land, buildings and other fixed assets. Mortgage bondholders have a prior claim to the assets specifically pledged as security. The specific property pledged are of two general types: Real estate – consists of land and property attached to the land Chattels – consist of personal and movable property a lien (UK: /ˈliːən/; US: /ˈliːn/) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation a passive right to retain (but not sell) property until the debt or other obligation is discharged. by: Mrs. Belen Apostol

Classification of Bonds as to Type of Security Real estate mortgages may be classified according to claims: Senior liens (first mortgage bonds)-Having prior claim to fixed assets pledged as security. Junior liens (second mortgage or third mortgage bonds) – having subsequent liens to fixed assets pledged as security. They have a subordinated priority claim to senior liens.

Classification of Bonds as to Type of Security Real estate mortgages may be classified according to type of issue: Closed-end issue – subsequent issues on the specific property pledged are not allowed. Open-end issue – permits the issuance of additional bond issues or series to be made under the original mortgage secured by a single lien. - characterized by series bonds (having various maturity dates, principal amounts, and interest rates but with identical security) 3. Limited open-end issue – allowing additional bonds to be sold after a maximum amount. The issue becomes closed when the specified amount of bonds have been issued.

Classification of Bonds as to Type of Security Assumed Bonds – when a corporation buys another corporation, or merged with another, the liabilities of the deceased corporation are “assumed” by the surviving corporation Guaranteed Bond – payment of interest, principal or both is guaranteed by one or more individuals or corporations. Joint bonds – property owned jointly be several companies which was used as a security for a bond issue. The companies bind themselves jointly as debtors.

Classification of Bonds by Method of Participation in Earnings afinan1 1st sem 11 - 12 Classification of Bonds by Method of Participation in Earnings Bonds may be classified according to the method of participation in earnings of the company. Bonds with fixed contractual interest rates of which there are two types Coupon bonds Registered bonds 2. Bonds with fixed contractual rate with payment contingent upon earnings (income bonds) coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the interest rate that a bond issuer pays to a bondholder.[1] several coupons, one for each scheduled interest payment covering a number of years, were printed on the certificate. At the due date the owner would physically detach the coupon and present it for payment of the interest (known as "clipping the coupon").[2] by: Mrs. Belen Apostol

Classification of Bonds by Method of Participation in Earnings Bonds may be classified according to the method of participation in earnings of the company. Bonds with fixed contractual rate with participating feature of which there are four types: Participating bonds Convertible bonds Bonds with warrants Bonds with junior security attached.

Classification of Bonds by Method of Participation in Earnings afinan1 1st sem 11 - 12 Classification of Bonds by Method of Participation in Earnings Coupon bonds – having attachments of a series of postdated certificates (coupons) payable to the bearer for the interest over the life of the bonds (bearer bonds). Registered bonds – names of owners are recorded on the transfer books of the company. The owners receive payment for interest and principal by checks drawn in their favor Several coupons, one for each scheduled interest payment covering a number of years, were printed on the certificate. At the due date the owner would physically detach the coupon and present it for payment of the interest (known as "clipping the coupon"). a bond whose owner is recorded on the books of the issuer; can be transferred to another owner only when endorsed by the registered owner by: Mrs. Belen Apostol

Classification of Bonds by Method of Participation in Earnings afinan1 1st sem 11 - 12 Classification of Bonds by Method of Participation in Earnings Income bonds – debt instruments with a fixed rate of interest payable only if earned and declared by the Board of Directors. Participating bonds – bonds which stipulate a fixed coupon rate but which also provide a method of receiving additional income over and above this minimum sum. This additional income comes from the corporate earnings then available and paid out as dividends. A type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments being paid only if the issuing company has enough earnings to pay for the coupon payment. Read more: http://www.investopedia.com/terms/i/incomebond.asp#ixzz1YRaO7A9M by: Mrs. Belen Apostol

Classification of Bonds by Method of Participation in Earnings Convertible bonds – debenture bonds or junior-lien mortgage bonds wherein the owner has the option to exchange his bond to a specified number of shares of common stock, preferred stock (less frequent), or other types of bonds. Bonds with Warrants – warrants attached to bonds, having an option or a right to purchase stock at a stated price during a stipulated period of time

Classification of Bonds by Method of Participation in Earnings Warrants may be detachable (sold or exercised apart form the bond) or non-detachable(cannot be sold separately from the bond) Bonds with Junior Security Attached – issued along with some share of stock in a package sale or block sale. Bondholders may share with stockholders with dividends declared.

Bonds Classified by Method of Retirement Serial bonds – mature semi-annually or annually instead of a single date. Matured in series because of its staggered repayment schedule. Sinking Fund Bonds – retired with the provision of a sinking fund. The provision requires the issuer to deposit annually certain sums of money with the trustee of the issue for the retirement of the part of the issue before maturity. (periodic repayments)

Bonds Classified by Method of Retirement Callable bonds – the terms of the issue can be cancelled or called. The call privilege enables the issuing company to pay off a bond issue prior to maturity. Convertible bonds – bonds exchange for common stock of the issuing company at a fixed price, at a pre-determined redemption date, and at the option of the bondholder. Once converted, it is considered as retired.

Bonds Classified by Method of Retirement afinan1 1st sem 11 - 12 Bonds Classified by Method of Retirement Perpetual bonds – cannot be redeemed by demanding repayment. Used in public finance in which the debtor (government), is assumed to have permanent existence. is a bond with no maturity date.[1] Therefore, it may be treated as equity, not as debt. Perpetual bonds pay coupons forever, and the issuer does not have to redeem them by: Mrs. Belen Apostol

Reasons for the Use of Bonds When a franchise or a license is issued to a corporation providing a guarantee of a return on capital investments When economic conditions allow the payment of interest at a rate lower than what is paid to common stock in the form of dividends When the present owners of the corporation want to retain their share of the voting power.

Reasons for the Use of Bonds afinan1 1st sem 11 - 12 4. When investor resistance to the purchase of common stock is very strong; and when such resistance is not found in the sale of bonds. When the degree of safety offered by the issuer attracts investors. When tax advantages are derived from the exercise When there is a sufficient demand from institutional investors like banks, insurance companies, and pre-need firms. by: Mrs. Belen Apostol

afinan1 1st sem 11 - 12 Indenture Indenture – contract between the corporation and the trustee on behalf of the bondholders. Contains the terms of the bond issue, the manner of its fulfillment, rights and responsibilities of bondholders and duties of the trustee. Contents of the indenture: The amount, duration, and denomination of the bond issue If applicable, the serial issues and size of each issue Bond Indenture (also trust indenture or deed of trust) is a legal document issued to lenders and describes key terms such as the interest rate, maturity date, convertibility, pledge, promises, representations, covenants, and other terms of the bond offering. by: Mrs. Belen Apostol

Indenture Contents of the indenture: 3. The rate of interest, terms of payment, designated place of collection 4. The rights, privileges, limitations attached to the issue 5. Type of security and its terms 6. Terms and conditions of mortgage or pledge of securities. 7. The manner of redemption 8. Remedies available to bondholders in case of default of the issuing corporation 9. Replacement of mutilated or lost bond certificate 10. Duties and remunerations of the trustees

Trustee Person who handles the money or property on behalf of another in a trust. The role of trustee in a bond issue is to see that the issuing corporation complies with the provision of the indenture. Duties include: To represent the bondholder in case of default To make payment of interest and principal

Trustee Duties include: 3. To take care of the sinking fund 4. To report annually to the bondholders on his operations and the condition of the bond issue and its pledged security; 5. To supply lists to bondholders to any bondholder, enabling the bondholders to form special committees to protect their interest at any time 6. To notify the bondholder of any default 7. To inform bondholder of any loans by the trustee to the corporation