Corporate finance essencials

CHAPTER 6
TYPES OF BONDS
1. Income bonds
Coupon payments are paid if company has any income, pay to investors. Company is not obligated to pay the issuer.
Risk vs. Yield: higher risk thehigher the yield and vice versa.
2. Convertible bonds
Investor has the option to convert the bond into a number of stocks. $1000 bond to $25 x 30 stocks: no affordable. (lower risk, lower yield)3. Put bonds
Allow holder to force the company to buy back the bond, very rare. Company runs the risk. (risk is lower, yield is lower).
4. Callable bonds:
Bonds owned by the issuer, the bondcan be callable if the interest rise/down.
10% to 7%: would like to save a 3% the action of calling back a bond (paying a penalty), re-issue and the whole cost of the re issue is 4% so it is cheaperto not reissue the bond.
If the cost is minimal then you would convert.
Beginning of chapter: convertible bond. Exotic bond: convertible bond, 99 year bond
Bottom page: 77
Bonds are traded overthe counter market. (OTC) No centralized place to make the transaction. It is used as a dealer network, all dealers are interconnected. Bond market is huge. Different types with different maturities,only for a given company so that is why the bond market is huge.
Government bonds:
Bills: maturity to 1 year. Use a discount formula (bank discount formula) work similar as zero-coupon bonds, theymake no payment. If I buy a $1000 zero-coupon bond (face value), in one year you are going to get a discount, $950.
Notes: 1 to 10 years. They are quoted in 30 seconds. (Page 181 column rate 9) couponrate: 9% which never changes, maturity, bid: dealer is going to buy at, ask: dealer is going to sell at. Which are percent’s of the face value. Spread: difference between the bid and ask price.Tick: slowest amount a bond can go down/up: 1/32. Change: change of how the bond could went down or up, 22 ticks (22/32). Ask yield: yield to maturity based on the ask price, which is the yield you earn...