CHAPTER NINETEEN
TYPES OF FIXED-INCOME
ANALYSIS
1
SAVINGS DEPOSITS
• COMMERCIAL BANKS
– their financial products include various fixedincome securities, and are
• usually insured by a federal agency, such as the
Federal Deposit Insurance Corporation, known as
the FDIC
2
SAVINGS DEPOSITS
• OTHER SAVINGS INSTITUTIONS:
– Savings and Loan Companies
– Mutual Savings Banks
– Credit Unions
3
THE MONEY MARKET
• DEFINITION: a market for buyers and
sellers of short-term (less than one year in
maturity) financial products
4
THE MONEY MARKET
• MONEY MARKET INSTRUMENTS
–
–
–
–
–
commercial paper
certificates of deposit
Bankers’ acceptances
eurodollars
repurchase agreements (repos)
5
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)
6
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
7
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
8
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
9
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
10
FEDERAL AGENCY
SECURITIES
• BONDS OF FEDERAL AGENCIES
–
–
–
–
–
Department of Defense
Export-Import Bank
Federal Housing Authority
Postal Service
Tennessee Valley Authority
11
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
12
STATE AND LOCAL
GOVERNMENT SECURITIES
• ISSUING AGENCIES
– States
– Special Districts
– Municipalities, Counties and Townships
13
STATE AND LOCAL
GOVERNMENT SECURITIES
• TYPES OF MUNICIPAL BONDS
– General Obligation
– Revenue
– Industrial Development
14
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
15
CORPORATE BONDS
• THE INDENTURE
– DEFININTION: a legal document formally
describing the terms of the legal relationship
between a bond issuer and bondholders.
16
CORPORATE BONDS
• THE INDENTURE
– The Trustee
• acts to protect the interests of bondholders
• facilitates communications between them and the
issuer
• the indenture promises the trustee that it will comply
with a number of stated provisions
17
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
19
CORPORATE BONDS
• CALL PROVISIONS
– the option to pay off the bond at par at any time
prior to maturity
20
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
21
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
22
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 denominated in
U.S. dollars issued in the U.S. by a Canadian firm
23
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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