1. Copyright © Texas Education Agency, 2012. All rights reserved. 1 Corporate Financing Using Bonds Statistics & Risk Management

2. Copyright © 2012 Texas Education Agency. All rights reserved. “Copyright and Terms of Service Copyright © Texas Education Agency. The materials found on this website are copyrighted © and trademarked ™ as the property of the Texas Education Agency and may not be reproduced without the express written permission of the Texas Education Agency, except under the following conditions: 1)Texas public school districts, charter schools, and Education Service Centers may reproduce and use copies of the Materials and Related Materials for the districts’ and schools’ educational use without obtaining permission from the Texas Education Agency; 2) Residents of the state of Texas may reproduce and use copies of the Materials and Related Materials for individual personal use only without obtaining written permission of the Texas Education Agency; 3) Any portion reproduced must be reproduced in its entirety and remain unedited, unaltered and unchanged in any way; 4) No monetary charge can be made for the reproduced materials or any document containing them; however, a reasonable charge to cover only the cost of reproduction and distribution may be charged. Private entities or persons located in Texas that are not Texas public school districts or Texas charter schools or any entity, whether public or private, educational or non-educational, located outside the state of Texas MUST obtain written approval from the Texas Education Agency and will be required to enter into a license agreement that may involve the payment of a licensing fee or a royalty fee. Call TEA Copyrights with any questions you have.

3. Copyright © Texas Education Agency, 2012. All rights reserved. Why Bonds? Issuing bonds do not convey ownership. Issuing bonds do not convey ownership. Considered debt only. Considered debt only. 3

4. Copyright © Texas Education Agency, 2012. All rights reserved. Bond Sales Bond have a face value. Bond have a face value. – Discounts – Premiums Interest Rates Interest Rates Maturity Dates Maturity Dates Bonds can be sold and resold at market value. Bonds can be sold and resold at market value. 4

5. Copyright © Texas Education Agency, 2012. All rights reserved. Defaults Interest payments and bond pay off have been put in default. Interest payments and bond pay off have been put in default. Bond Holders get available funds before stock holders do. Bond Holders get available funds before stock holders do. What happened to General Motors Bonds/Stocks? What happened to General Motors Bonds/Stocks? 5

6. Copyright © Texas Education Agency, 2012. All rights reserved. Bonds Ratings Through the years, businesses have been established who rate the risk of bonds being issued. Through the years, businesses have been established who rate the risk of bonds being issued. Base Ratings the bond is evaluated Base Ratings the bond is evaluated Insured Ratings is when the bond is insured and the rating only applies to the insurer. Insured Ratings is when the bond is insured and the rating only applies to the insurer. Be careful you understand what the rating is really evaluating when you buy a bond. Be careful you understand what the rating is really evaluating when you buy a bond. 6

7. Copyright © Texas Education Agency, 2012. All rights reserved. Moody's credit ratings Investment grade RatingLong-term ratingsShort-term ratings AaaRated as the highest quality and lowest credit risk. Prime-1 Best ability to repay short-term debt Aa1 Rated as high quality and very low credit risk. Aa2 Aa3 A1 Rated as upper-medium grade and low credit risk. A2 Prime-1/Prime-2 Best ability or high ability to repay short term debt A3 Baa1 Rated as medium grade, with some speculative elements and moderate credit risk. Prime-2 High ability to repay short term debt Baa2 Prime-2/Prime-3 High ability or acceptable ability to repay short term debt Baa3 Prime-3 Acceptable ability to repay short term debt Speculative grade RatingLong-term ratingsShort-term ratings Ba1 Judged to have speculative elements and a significant credit risk. Not Prime Do not fall within any of the prime categories Ba2 Ba3 B1 Judged as being speculative and a high credit risk. B2 B3 Caa1 Rated as poor quality and very high credit risk. Caa2 Caa3 Ca Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest. C Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest. 7

8. Copyright © Texas Education Agency, 2012. All rights reserved. Special Bonds Some special bodies and agencies can issue Municipal Bonds that pay interest that is non taxable (Federal Income tax) to the bond holder. Some special bodies and agencies can issue Municipal Bonds that pay interest that is non taxable (Federal Income tax) to the bond holder. What do you think is the reason for this? What do you think is the reason for this? 8