chapter 7 note - Omar M Al Nasser Ph.D MBA Visiting...

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Omar M. Al Nasser, Ph.D., MBA. Visiting Assistant Professor of Finance School of Business Administration University of Houston-Victoria Email: [email protected] Chapter 7 Bond Markets Outline Background on Bonds Bond Yields Treasury and Federal Agency Bonds Treasury Bond Auction Trading Treasury Bonds Treasury Bond Quotations Stripped Treasury Bonds Inflation-Indexed Treasury Bonds Savings Bonds Federal Agency Bonds Municipal Bonds Credit Risk Characteristics of Municipal Bonds Trading and Quotations Yields Offered on Municipal Bonds Corporate Bonds Corporate Bond Offerings Characteristics of Corporate Bonds Corporate Bond Yields and Risk Secondary Market for Corporate Bonds Corporate Bond Quotations Junk Bonds How Corporate Bonds Facilitate Restructuring Structured Notes Institutional Use of Bond Markets Globalization of Bond Markets Eurobond Market
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POINT/COUNTER-POINT: Should Financial Institutions Invest in Junk Bonds? POINT: Yes. Financial institutions have managers who are capable of weighing the risk against the potential return. They can earn a significantly higher return when investing in junk bonds than the return on Treasury bonds. Their shareholders benefit when they increase the return on the portfolio. COUNTER-POINT: No. The financial system is based on trust in financial institutions and confidence that the financial institutions will survive. If financial institutions take excessive risk, the entire financial system is at risk. WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue. ANSWER: The answer may depend on the type of financial institution of concern. Lending institutions are expected to provide credit to creditworthy customers, and junk bonds may be viewed as a form of gambling. These institutions do not invest in junk bonds. Insurance companies may invest in junk bonds, but there is some concern that the confidence in insurance companies could be shaken if there are failures because of defaults on junk bonds held by insurance companies. Perhaps the ideal type of institutional investor in junk bonds is a mutual fund that specializes in investing in junk bonds, since the fund’s objective would be clearly communicated to investors, and only those investors who wanted to accept the high risk would invest in these types of mutual funds. Questions 1. Bond Indenture. What is a bond indenture? What is the function of a trustee, as related to the bond indenture? ANSWER: The bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. It is designed to address all matters related to the bond issue, such as collateral, and call provisions. A trustee represents the bondholders in all matters concerning the bond issue, including the
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chapter 7 note - Omar M Al Nasser Ph.D MBA Visiting...

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