The Bond Market

1
Chapter 15

• The Bond Market

2
Bond Basics

• Interest - coupon rate
• Principal amount
• Maturity date

3
Bond Basics

• The indenture
• The trustee

4
Bonds are Issued as

• Bearer bond
• Registered bond
• Book-entry bond

5
Positively Sloped Yield Curve
6
Time and Yields

• Negatively sloped yield curve
• Flat yield curve

7
Risk to Bondholders

• Default - failure to meet the terms of the
  indenture
• Fluctuations in interest rates
• Reinvestment rate risk

8
Risk to Bondholders

• Loss of purchasing power
• Foreign exchanges rates
• Essentially, the same sources of risk that apply
  to stockholders

9
Importance of Ratings

• Moodys and Standard Poors ratings
• Investment grade - triple B or better
• Non-investment grade (high-yield bonds)

10
Importance of Ratings

• Similarity of ratings
• Differences are small
• Ratings do change over time.

11
Mechanics of Purchasing Bonds

• Brokers
• Commissions
• Confirmation statements
• Accrued interest
• paid by the buyer
• received by the seller

12
The Variety of Corporate Bonds

• Mortgage bonds
• Equipment trust certificates and asset-backed
  securities
• Debentures
• Income bonds

13
The Variety of Corporate Bonds

• Convertible bonds
• Variable interest rates bonds
• Zero coupon and discount bonds
• Eurobonds

14
The Variety of High-yield Bonds

• Fallen Angels
• Pay-in-kind bonds
• Split coupon bonds
• Reset and increasing rate bonds
• Extendible bonds

15
High-yield Bonds

• Non-investment grade
• Spread in yields
• Realized returns
• Reorganizations
• Investment companies as a means to acquire
  high-yield securities

16
Retiring Debt

• Serial bonds
• Term bonds and sinking funds
• Repurchases

17
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