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investstudyguide - Pezzy Bros and T-Bones Steller Review 1...

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Pezzy Bro’s and T-Bones’ Steller Review 1. Requirements for a Bond I.P.O. (pages 56-60) I.P.O.- An issue that usually is sold to one or a few institutional investors and is generally held to maturity (Primary Market) They are marketed by investment bankers (underwriters) Steps involved: File preliminary registration statement with SEC (red herring), which describes the issue and prospects of the company When the statement is approved it is called the prospectus and the price at which the securities will be offered is announced. Can follow Rule 415: Shelf registration, allowing firms to register securities and gradually sell them to the public for 2 years following the initial registration. 2. Premium/Discount Bonds (Look at #’s 33, 57 and 59) Premium Bonds (Selling above Par Value) Coupon Rate > YTM Discount (Selling below Par Value) Coupon Rate < YTM 3. Calculate Current Yield (Look at #’s 39 and 50) The Bond’s annual coupon rate divided by the bond price Ex. 8%, 30 yr. bond currently selling at $1,276.76 Current Yield= $80/1,276.76 = 6.27% per yr. 4. Bond Price Quotes The bond prices that you see quoted in the financial papers are NOT actually the prices that investors pay for the bond. This is because the quoted price does NOT include the interest that accrues between coupon payment dates
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If a bond is purchased between coupon payments, the buyer must pay the seller for accrued interest *The Bond price is quoted net of interest 5. Attributes of a Municipal Bond (Look at #’s 46 and 62) Issued by state and local governments Similar to Treasury and corporate bond, except their interest income is tax exempt from federal, state and local authorities But they must pay capital gains taxes 2 types: 1. General Obligation Bonds- backed by “full faith and credit” of the issuer 2. Revenue Bonds- issued to finance particular projects and are backed either by revenues from that project or by the municipal agency operating the project - Typical issuers of revenue bonds are airports, hospitals and turnpike authorities - Industrial Development Bonds- Type of Revenue Bond that is issued to finance commercial enterprises Like Treasury Bonds, Muni bonds vary widely in maturity (up to 30 years)
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