Business Finance - Unit 12 & 13

Bond

Long-term debt instruments that specifies:

• The principle (amount owed)

• The interest (payment for the use of the principle)

• The maturity (the day on which the debt must be repaid)

Yield

Return on a bond expressed as

• A current yield (interest divided by the current price of the bond)

• The yield to maturity (return earned from holding the bond until it matures)

Indenture

Document specifying the terms of a debt issue

Default

Failure to meet the terms specified in the indenture of a debt issue

Trustee

Representative of the rights of bondholders who enforces the terms of the indenture

Credit Ratings

Classification schemes designed to indicate the risks associated with a particular debt instrument

Mortgage Bonds

Bonds secured by a claim on real estate

Collateral

Assets used to secure a loan or debt instrument

Equiptment Trust Certificates

Serial bonds issued by transportation companies that are secured by the equipment purchased with the proceeds of the loan

Debentures

Unsecured bonds

Subordinated Debentures

Bonds with a lower claim on the firm’s assets than the claims of other debt instruments

Income Bonds

Bonds whose interest is paid only if it is earned by the firm

Revenue Bonds

Bonds supported by the assets the bonds financed; income bonds issued by state and local governments

Convertible Bonds

Bonds that may be converted into (exchanged for) stock at the opinion of the bondholder

Variable Interest Rate Bonds

Long-term debt instruments whose interest payments vary with changes in short-term interest rates or the Consumer Price Index

Zero Coupon Bonds

Bonds that are initially sold at a discount and on which interest accrues and is paid at maturity

High-Yield Securities (Junk Boxes)

Poor-quality debt with high-yields and high probability of default

Eurobond

Bond sold in a foreign country but denominated in the currency of the issuing firm

Serial Bonds

Debt issued in a series so that some of the bonds periodically mature

Sinking Fund

Series of periodic payment to retire a bond issue

Call Feature

Right of a debtor to retire (call) a bond prior to maturity

Tax-Exempt Bonds

Bonds issued by a state of municipal government whose interest is exempt from federal income taxation