2. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 15 The Bond Market

3. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bond Basics Interest - coupon rate Principal amount Maturity date

4. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bond Basics The indenture The trustee

5. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Bonds are Issued as Bearer bond Registered bond Book-entry bond

6. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Time and Yields Positively sloped yield curve

7. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Time and Yields Negatively sloped yield curve

8. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Risk to Bondholders Default - failure to meet the terms of the indenture Fluctuations in interest rates Reinvestment rate risk

9. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Risk to Bondholders Loss of purchasing power Foreign exchanges rates Essentially, the same sources of risk that apply to stockholders

10. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Importance of Ratings Moody’s and Standard & Poor’s ratings Investment grade - triple B or better Non-investment grade (high-yield bonds)

11. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Importance of Ratings Similarity of ratings Differences are small Ratings do change

12. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Mechanics of Purchasing Bonds Brokers Commissions Confirmation statements Accrued interest –paid by the buyer –received by the seller

13. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of Bonds Mortgage bonds Equipment trust certificates Debentures Income bonds

14. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of Bonds Convertible bonds Variable interest rates bonds Zero coupon and discount bonds Eurobonds

15. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Variety of High-Yield Bonds Pay-in-kind bonds Split coupon bonds Reset and increasing rate bonds Extendible bonds

16. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. High-yield Bonds Non-investment grade Spread in yields Realized returns Reorganizations Investment companies as a means to acquire high-yield securities

17. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Retiring Debt Serial bonds Term bonds Repurchases

18. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 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