Chapter 6

examples of fixed income

bonds, debentures, mortgages, swaps, preferred shares

what happens when you violate a protective provision?

technical default (give money back)

what can real return bonds be used for?

discover the market’s inflation expectations

Fixed income

fixed stream of cash flows

Bond terms

described in a bond trust and outlines the legal rights of borrower

Liquid bonds

trade with large volume

Marketable bonds

have an existing market

Sinking fund

requires the issuer to buy back bonds over time

Purchase fund

require the issuer to buy back bonds over time if the bonds are below par

Convertible bonds

have a provision that lets the bond be converted to shares

Protective provisions (covenants)

restrict the borrowers behavior

Treasury bills

short term discount bonds

Marketable bonds (treasury)

medium/long term with coupon payments

Real return bonds

give a return based on inflation rates

difference between bonds and debentures

bonds are secured

discount bonds

investors get the difference between price and FV at maturity

types of bonds

short/med/long, liquid, marketable

are bonds liquid?

each bond is less liquid

types of bond coupon rates

floating fixed

types of bond maturity

callable, retractable

callable bonds

can be repurchased by issuer before maturity

retractable bonds

can be sold back to issuer

types of planned repurchases

sinking, purchase fund

types of government bonds

treasury bills, marketable bonds

do government bonds have risk?

risk free from bankruptcy

types of corporate bonds

mortgage, collateral trust, equipment trust

what is collateral in a mortgage?

assets

what is collateral in a collateral trust?

financial

what is collateral in an equipment trust?

equipment

characteristics of corporate debentures…

unsecured, floating/fixed, subordinated/non-subordinated

short term corporate borrowing

commercial paper

strip bonds

strips a bond of its coupon payments to create a series of discount bonds

what do retail investors invest in?

term deposits and GICS from banks