Bonds - Bond Prices and Yields Readings: Chapter 14 1 Bond...

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1 Bond Prices and Yields Readings: Chapter 14
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2 Bond Characteristics Coupon (interest income) Maturity – money market, notes and bonds Principal (face/par) value – different from market value Credit risk
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3 Corporate Bonds Types of Issues Secured (senior) bonds Unsecured bonds (debentures) Subordinated (junior) debentures Indenture provisions (covenant) – mitigating default risk and recovery risk Bond indentures to protect creditors Sinking fund provisions Subordination Dividend restrictions
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4 Provisions of Bonds Call Provisions Callable (call premium) Puttable bonds Convertible bonds Floating-rate bonds These features can affect a bond’s maturity as well as price
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5 Credit Risk Other than the US Treasury bonds, most other bonds, including corporate bonds, municipal bonds and sovereign bonds, carry credit risk , i.e., the risk of default Credit risk is usually measured by credit ratings – more accounting-based Investment grade bonds – rated BBB and above Speculative grade bonds – high yield or junk bonds
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6 Moody’s S&P Aaa(1,2,3) AAA Aa AA A A Baa BBB Ba BB B B Caa CCC Ca CC C C D D Investment grade Speculative grade (junk bonds) Bond Ratings
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7 Bond Ratings Ratings Services Moody’s, Standard & Poor’s, Fitch Investors Service, Duff and Phelps Determinants of corporate credit ratings Coverage ratios, leverage ratios, liquidity ratios, profitability ratios, cash flow-to-debt ratio
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This note was uploaded on 01/17/2012 for the course MGMT 141 taught by Professor Chernyshoff,n during the Fall '08 term at UC Irvine.

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Bonds - Bond Prices and Yields Readings: Chapter 14 1 Bond...

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