RECAPE LAST CLASS
FINANCIAL SECURITIES & MARKETS
IF THE FIRM DECIDE TO ARRANGE ADDITIONAL
FINANCING, THEY HAVE TWO CHOICES:
1. TO SEEK ADDITIONAL OWNERS WHO WILL
ALSO PURCHASE SHARES OF THE FIRM.
2. TO BORROW MONEY FROM CREDITORS, THUS
CREATING DEBT SECURITY
FINANCIAL SECURITIES & MARKETS
• BOTH DEBT AND EQUITY SECURITIES ARE
USED IN MOST CORPORATIONS.
• THE THREE MAJOR FINANCIAL SECURITIES
ARE:
1. BONDS
2. PREFERRED STOCK
3. COMMON STOCK
FINANCIAL SECURITIES & MARKETS
BONDS OR CORPORATE BOND / DEBENTURE /
NOTE
• A CORPORATE BOND IS A SECURITY
REPRESENTING A LONG-TERM PROMISE TO
PAY A CERTAIN SUM OF MONEY AT A CERTAIN
TIME OR OVER THE COURSE OF THE LOAN,
WITH A FIXED RATE OF INTEREST PAYABLE TO
THE HOLDER OF THE BOND.
FINANCIAL SECURITIES & MARKETS
CLASSIFICATIONS AND CHARACTERISTICS OF
BONDS
1.
2.
3.
4.
SECURED AND UNSECURED BONDS
BOND MATURITY
OWNERSHIP
SPECIAL FEATURES
FINANCIAL SECURITIES & MARKETS
SECURED AND UNSECURED BONDS
SECURED:
SOME BONDS ARE SECURED BY SPECIFIC
ASSETS. A MORTGAGE BOND IS SECURED BY A
MORTGAGE LIEN ON A PIECE OF PROPERTY OR
ON A BUILDING.
FINANCIAL SECURITIES & MARKETS
SECURED AND UNSECURED BONDS
• A COLLATERAL TRUST BOND IS SECURED BY
COLLATERAL, SUCH AS STOCKS OR BONDS
HELD BY A TRUSTEE
• AN EQUIPMENT TRUST BOND IS SECURED BY
A PIECE OF MACHINARY OR EQUIPMENT,
SUCH AS A LOCONOTIVE.
FINANCIAL SECURITIES & MARKETS
BOND MATURITY
• BONDA HAVE A FIXED MATURITY SPECIFIED IN
THE BOND INDENTURE.
• A SERIAL BOND ISSUE HAS PORTIONS THAT
MATURE IN SMALL AMOUNTS AT PERIODIC
INTERVALS.
EXAMPLE BONDS NUMBERED 1 TO 100 MAY
MATURE IN 1995, AND 101 TO 200 MAY AMTURE IN
1998 AND SO ON
FINANCIAL SECURITIES & MARKETS
BOND MATURITY
AMORTIZATION
• A SINKING FUND BOND ISSUE REQUIRES THE
FIRM TO SET ASIDE MONEY AT REGULAR
INTERVALS, USUALLY PAYABLE TO A TRUSTEE, SO
THAT SUFFICIENT FUNDS ACCURE TO REPAY THE
PRINCIPAL AT MATURITY.
• THE SETTING ASIDE OF MONEY AT INTERVALS
FOR THE GRADUAL PAYMENT OF A DEBT IS
CALLED AMORTIZATION
FINANCIAL SECURITIES & MARKETS
OWNERSHIP
• BEARER BONDS OR COUPON BONDS ARE
OWNED BY THE PERSON WHO HAS PHYSICAL
POSSESSION OF THEM.
• THESE BONDS ARE SAID TO BE HIGHLY
NEGOTIABLE IN THAT THEY ARE EASILY
TRANSFERRED OR SOLD TO OTHER PARTIES.
FINANCIAL SECURITIES & MARKETS
OWNERSHIP
• THESE BONDS HAVE COUPONS ATTACHED TO
THEM, WHICH REPRESENT THE INTEREST
PAYMENTS ON SPECIFIED DATES
FINANCIAL SECURITIES & MARKETS
SPECIAL FEATURES
• BONDS MAY BE CLASSIFIED BY THE SPECIAL
FEATURES ASSOCIATED WITH THEM SUCH AS
THE FOLLOWING;
1. INCOME BONDS
2. CONVERTIBLE BONDS
3. ATTACHED WARRENTS BONDS
4. CALLABLE BONDS
FINANCIAL SECURITIES & MARKETS
INCOME BONDS
• INTEREST ON INCOME BONDS DOES NOT
HAVE TO BE PAID UNLESS THE FIRM EARNS
SUFFICIENT INCOME TO COVER THE INTEREST
PAYMENT.
• INCOME BONDS ARE USUALLY ISSUED IN
CONNECTION WITH THE REORGANIZATION OF
A FINANCIALLY TRUBLED FIRM
FINANCIAL SECURITIES & MARKETS
CONVERTIBLE BONDS
• CONVERTIBLE BONDS CAN BE CONVERTED
INTO COMMON STOCK OR ANOTHER
SECURITY OF THE SAME CORPORATION AT A
STATED PRICE, UNDER STATED CONDITIONS,
AT THE OPTION OF THE HOLDER.
FINANCIAL SECURITIES & MARKETS
CONVERTIBLE BONDS
• WHEN THE BOND IS ISSUED, THE
CONVERSION PRICE WILL BE HIGHER THAN
THE CURRENT PRICE.
• THE MARKET PRICE MAY RISE ABOVE THE
CONVERSION PRICE. THIS WILL INCREASE THE
VALUE OF THE BOND AND MAKE IT
ATTRACTIVE TO CONVERT IT INTO STOCK
FINANCIAL SECURITIES & MARKETS
CONVERTIBLE BONDS
• IN RETURN FOR THIS ATTRACTIVE FEATURE, A
CONVERTIBLE BOND NORMALLY REQUIRES
THE FIRM TO PAY LESS INTEREST THAN
WOULD BE PAID FOR A COMPAREABLE
NONCONVERTIBLE BOND.
FINANCIAL SECURITIES & MARKETS
ATTACHED WARRENTS
• ATTACHED WARRENTS USED TO INCREASE THE
ATTRACTIVENESS OF A BOND ISSUE PERMIT
THE BONDHOLDER TO BUY SHARES OF
COMMON STOCK DURING A STATED TIME
PERIOD AND A GIVEN PRICE
FINANCIAL SECURITIES & MARKETS
CALLABLE BONDS
• CALLABLE BONDS CONTAIN A PROVISION IN
THE BOND INDENTURE THAT ALLOWS THE
FIRM TO RETIRE THE ISSUE AT A FIXED PRICE
PRIOR TO MATURITY.
• THA CALL PRICE IS NORMALLY SLIGHTLY
ABOVE PAR.
FINANCIAL SECURITIES & MARKETS
CALLABLE BONDS
• MOST BONDS HAVE A CALL FEATURES AND
USUALLY THE BONDHOLDERS ARE GIVEN THE
OPTION OF CONVERTING THE BOND INTO
COMMON STOCK DURING THE PERIOD
BETWEEN THE CALL AND THE RETIREMENT
DATE
FINANCIAL SECURITIES & MARKETS
COMMERCIAL PAPER
• IS AN UNSECURED PROMISSORY NOTES WITH A FIXED
MATURITY OF 1 TO 270 DAYS
• COMMERCIAL PAPER IS A MONEY MARKEY SECURITY
ISSUED BY A LARGE BANKS AND CORPORATIONS TO
GET MONEY TO MEET SHORT TERM DEBT
OBLIGATIONS E.G. PAYROLL AND IS ONLY BACKED BY
AN ISSUING BANK OR CORPORATION’S PROMISE TO
PAY THE FACE AMOUNT ON THE MATURITY DATE
SPECIFIED ON THE NOTE.
FINANCIAL SECURITIES & MARKETS
COMMERCIAL PAPER
• ONLY FIRMS WITH EXCELLENT CREDIT
RATINGS FROM A RECOGNISED AGENCY WILL
BE ABLE TO SELL THEIR COMMERCIAL PAPER
AT A REASONABLE PRICE
• IS USUALLY SOLD AT A DISCOUNT FROM FACE
VALUE AND CARIES SHORTER REPAYMENT
DATES THAN BONDS
FINANCIAL SECURITIES & MARKETS
CERTIFICATE OF DEPOSIT
• THEY ARE DIFFERENT FROM SAVING
ACCOUNTS IN THAT CD HAS A SPECFIC, FIXED
TERM OFTEN 3 MONTHS, 6 MONTHS OR 1 TO
5 YEARS AND USUALLY A FIXED INTEREST RATE
• SMALLER INSTITUTIONS TEND TO OFFER
HIGHER INTEREST RATES THAN LARGER ONES
FINANCIAL SECURITIES & MARKETS
LOAN NOTE
• A FORM OF VENDOR FINANCE OR DEFERRED
PAYMENT, IN WHICH THE PURCHASER ACTS AS
A BORROWER, AGREEING TO MAKE
PAYMENTS TO THE HOLDER OF THE
TRANFERABLE LOAN NOTE AT A SPECIFIED
FUTURE DATE
FINANCIAL SECURITIES & MARKETS
LOAN NOTE
• WHEN LOAN NOTES ARE USED BETWEEN
BUSINESSES THE PURCHASER IS ABLE TO ACT
AS BORROWER AND MAKE PAYMENTS
OVERTIME, OFTEN AT A MINIMAL OR AT COST
INTEREST RATE
FINANCIAL SECURITIES & MARKETS
JUNK BOND
• A BOND WITH A CREDIT RATING BB OR LOWER
ISSUED FOR LEVERAGED BUYOUTS AND
OTHER TAKEOVERS BY COMPANIES WITH
QUESTIONABLE CREDIT
FINANCIAL SECURITIES & MARKETS
JUNK BOND
• THE INTEREST RATE IS HIGHER IN ORDER TO
COMPENSATE HOLDERS FOR THAT RISK
• A BOND RATED USUALLY BB OR LOWER
BACAUSE OF ITS HIGH DEFAULT RISK. ALSO
KNOWN AS A HIGH-YIELD BOND