chap017 corp bonds
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Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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Corporate Bonds
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Corporate Bond Basics, II.
Corporate bonds differ from common stock in three
fundamental ways.
Corporate Bonds Common Stock
Represent a creditor¶s
claim on the corporation
Represents an ownershipclaim on the corporation
Promised cash flows
(coupons and principal)
are stated in advance
Amount and timing of dividends may changeat any time
Mostly callable Almost never callable
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Corporate Bond Basics, IV.
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Types of Corporate Bonds
Bonds issued with a standard, relatively simple set of
features are popularly called Plain Vanilla Bonds (or
³bullet´ bonds).
Debentures are unsecured bonds issued by acorporation.
Mortgage bonds are debt secured with a property lien.
Collateral trust bonds are debt secured with financial
collateral.
Equipment trust certificates are shares in a trust with
income from a lease contract.
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Bond Indentures
A Bond indenture is a formal written agreement
between the corporation and the bondholders.
This agreement spells out, in detail, the obligations of the corporation, the rights of the corporation, and the
rights of the bondholders (with respect to the bond
issue.)
In practice, few bond investors read the original
indenture. Instead, they might refer to an indenture
summary provided in the prospectus of the bond
issue.
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Bond Indentures, Cont.
The Trust Indenture Act of 1939 requires that any
bond issue subject to regulation by the Securities and
Exchange Commission (SEC) must have a trustee
appointed to represent the interests of the bondholders.
The Act is available at the SEC website:
± http://www.sec.gov
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Tombstone Ad, Convertible Notes Issue
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Convertible Bond Prices
and Conversion Values
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Event Risk
Event risk is the possibility that the issuing corporation
will experience a significant change in its bond credit
quality.
Example: In October 1992, Marriott Corporation
announced its intention to spin off part of the company.
± The spinoff, called Host Marriott, would acquire most of the
parent company¶s debt and its poorly performing real
estate holdings. ± Holding bonds in Host Marriott is more risky than holding
bonds in Marriott Corporation.
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Preferred Stock
Preferred stock has some of the features of both bondsand common stock.
Typically, preferred stock issues ± Do not grant voting rights to their holders,
± Promise a stream of fixed dividend payments,
± Have no specified maturity but are often callable,
± May have their dividends suspended without setting off abankruptcy process (as long as common stock dividendsare also suspended),
± Cumulate unpaid preferred dividends, and
± May be convertible.
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Corporate Bond Credit Rating Symbols
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High Yield Bonds Quotes
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Chapter Review, II.
Protective Covenants
Event Risk
Bonds Without Indentures
Preferred Stock Adjustable-Rate Bonds and Adjustable-Rate Preferred
Stock
Corporate Bond Credit Ratings
± Why Bond Ratings Are Important High-Yield (Junk) Bonds
Bond Market Trading