CHAPTER THIRTEEN

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CHAPTER THIRTEEN

• FIXED-INCOME ANALYSIS

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SAVINGS DEPOSITS

• COMMERCIAL BANKS
• their financial products include various
  fixed-income securities, such as
• demand deposits
• time deposits
• certificates of deposit

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SAVINGS DEPOSITS

• COMMERCIAL BANKS
• their financial products include various
  fixed-income securities, and are
• usually insured by a federal agency, such as the
  Federal Deposit Insurance Corporation, know as
  the FDIC

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SAVINGS DEPOSITS

• OTHER SAVINGS INSTITUTIONS
• Savings and Loan Companies
• Mutual Savings Banks
• Credit Unions

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THE MONEY MARKET

• DEFINITION a market for buyers and sellers of
  short-term (less than one year in maturity)
  financial products

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THE MONEY MARKET

• MONEY MARKET INSTRUMENTS
• commercial paper
• certificates of deposit
• bankers acceptances
• eurodollars
• repurchase agreements (repos)

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U.S. GOVERNMENT SECURITIES

• TYPES OF GOVERNMENT SECURITIES
• U.S. Treasury Bills
• issued on a discount basis
• maturities up to 52 weeks
• sold by auction (bid process)

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U.S. GOVERNMENT SECURITIES

• TYPES OF GOVERNMENT SECURITIES
• U.S. Treasury Notes
• longer term than T-bills
• from one to ten years
• semiannual coupon payments
• current owners are registered
• issued in denominations of 1000 or more
• active secondary market

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U.S. GOVERNMENT SECURITIES

• TYPES OF GOVERNMENT SECURITIES
• U.S. Treasury Bonds
• maturities greater than ten years
• denominations in 1,000 or more
• some have call provisions

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U.S. GOVERNMENT SECURITIES

• TYPES OF GOVERNMENT SECURITIES
• U.S. Savings Bonds
• nonmarketble and offered only to individuals
• Series EE are pure discount bonds
• Series HH mature in 20 years with semiannual
  coupon payments

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U.S. GOVERNMENT SECURITIES

• TYPES OF GOVERNMENT SECURITIES
• Zero Coupon Treasury Security Receipts or Coupon
  stripping
• Treasury bonds are purchased and placed in trust
  with a custodian
• sets of receipts issued for each coupon date
• another set of receipts issued for certain
  maturity dats

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FEDERAL AGENCY SECURITIES

• BONDS OF FEDERAL AGENCIES
• Department of Defense
• Export-Import Bank
• Federal Housing Authority
• Postal Service
• Tennessee Valley Authority

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FEDERAL AGENCY SECURITIES

• BONDS OF FEDERALLY SPONSORED AGENCIES
• Federal Home Loan Bank
• Federal National Mortgage Association
• Student Loan Mortgage Corporation
• Farm Credit Bank
• Resolution Funding Corporation

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STATE AND LOCAL GOVERNMENT SECURITIES

• ISSUING AGENCIES
• States
• Special Districts
• Municipalities, Counties and Townships

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STATE AND LOCAL GOVERNMENT SECURITIES

• TYPES OF MUNICIPAL BONDS
• General Obligation
• Revenue
• Industrial Development

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CORPORATE BONDS

• TAX TREATMENT
• How is the income from a bond treated in the tax
  return of the corporation?
• discount basis
• discount taxed as ordinary income by federal
  government
• coupon basis
• coupon taxed annually
• interest payments by corporation considered
  expenses to reduce taxable income

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CORPORATE BONDS

• THE INDENTURE
• DEFININTION a legal document formally
  describing the terms of the legal relationship
  between a bond issuer and bondholders.

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CORPORATE BONDS

• THE INDENTURE
• The Trustee
• acts to protect the intersts of bondholders
• facilitates communications between them and the
  issuer
• the indenture promises the trustee that it will
  comply with a number of stated provisions

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CORPORATE BONDS

• THE INDENTURE
• includes other terms such as the sale of assets,
  issuance of other bonds, dividends payment
  changes, and other issues that may change the
  profitability and solvency of the issuer

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CORPORATE BONDS

• TYPES OF BONDS
• mortgage
• collateral trust
• equipment obligations
• debentures
• income
• guaranteed

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CORPORATE BONDS

• CALL PROVISIONS
• the option to pay off the bond at par at any time
  prior to maturity

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CORPORATE BONDS

• THE INDENTURE
• Two Kinds of Call Provisions
• no calls in first five years or
• call premium is specified in the provision at
  time of issue

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CORPORATE BONDS

• SINKING FUNDS
• requires issuer to make annual payments to a fund
• the fund pays part of the principal each year
• trustee may also repurchase bonds in the open
  market

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FOREIGN BONDS

• WHAT CONSTITUTES A FOREIGN BOND?
• DEFINITION foreign bonds are bond offered in
  another currency outside the issuers country of
  origin
• Example
• a yankee bond is a foreign bond issued in the
  U.S. by a Canadian firm denominated in U.S.
  dollars

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PREFERRED STOCK

• DEFINITION a hybrid form of security that has
  characteristics of both common stocks and bonds
• similar to a perpetual bond
• receive preferential treatment before common
  stock in order of dividend payment
• unpaid dividends usually accumulate
• some are convertible to common stock

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• END OF CHAPTER 13