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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
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