Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 15 The Bond Market.

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Presentation transcript:

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 15 The Bond Market

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bond Basics Interest - coupon rate Principal amount Maturity date

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bond Basics The indenture The trustee

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bonds are Issued as Bearer bond Registered bond Book-entry bond

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Time and Yields Positively sloped yield curve

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Time and Yields Negatively sloped yield curve

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Risk to Bondholders Default - failure to meet the terms of the indenture Fluctuations in interest rates Reinvestment rate risk

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Risk to Bondholders Loss of purchasing power Foreign exchanges rates Essentially, the same sources of risk that apply to stockholders

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Importance of Ratings Moody’s and Standard & Poor’s ratings Investment grade - triple B or better Non-investment grade (high-yield bonds)

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Importance of Ratings Similarity of ratings Differences are small Ratings do change

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Mechanics of Purchasing Bonds Brokers Commissions Confirmation statements Accrued interest –paid by the buyer –received by the seller

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of Bonds Mortgage bonds Equipment trust certificates Debentures Income bonds

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of Bonds Convertible bonds Variable interest rates bonds Zero coupon and discount bonds Eurobonds

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of High-Yield Bonds Pay-in-kind bonds Split coupon bonds Reset and increasing rate bonds Extendible bonds

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. High-yield Bonds Non-investment grade Spread in yields Realized returns Reorganizations Investment companies as a means to acquire high-yield securities

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Retiring Debt Serial bonds Term bonds Repurchases

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Call Feature Option to retire bonds prior to maturity Is exercised after interest rates have declined The firm may refinance at the lower rate

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