Chapter 15
The Bond Market
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Bond Basics
• Interest - coupon rate
• Principal amount
• Maturity date
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Bond Basics
• The indenture
• The trustee
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Bonds are Issued as
• Bearer bond
• Registered bond
• Book-entry bond
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Time and Yields
• Positively sloped yield curve
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Time and Yields
• Negatively
sloped yield
curve
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Risk to Bondholders
• Default - failure to meet the terms
of the indenture
• Fluctuations in interest rates
• Reinvestment rate risk
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Risk to Bondholders
• Loss of purchasing power
• Foreign exchanges rates
• Essentially, the same sources of
risk that apply to stockholders
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Importance of Ratings
• Moody’s and Standard & Poor’s
ratings
• Investment grade - triple B or
better
• Non-investment grade (high-yield
bonds)
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Importance of Ratings
• Similarity of ratings
• Differences are small
• Ratings do change
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Mechanics of
Purchasing Bonds
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Brokers
Commissions
Confirmation statements
Accrued interest
–paid by the buyer
–received by the seller
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The Variety of Bonds
• Mortgage bonds
• Equipment trust certificates
• Debentures
• Income bonds
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The Variety of Bonds
• Convertible bonds
• Variable interest rates bonds
• Zero coupon and discount bonds
• Eurobonds
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The Variety of High-Yield Bonds
• Pay-in-kind bonds
• Split coupon bonds
• Reset and increasing rate bonds
• Extendible bonds
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High-yield Bonds
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Non-investment grade
Spread in yields
Realized returns
Reorganizations
Investment companies as a means
to acquire high-yield securities
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Retiring Debt
• Serial bonds
• Term bonds
• Repurchases
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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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