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Unformatted text preview: Bond Issues
Companies and governments borrow internationally by issuing bonds in two principal financial markets: the Eurobond market and the foreign bond market. Both
give borrowers the opportunity to obtain large amounts of long-term debt financing quickly, in the currency of their choice and with flexible repayment terms. 280 PART 2 TABLE 6.4 Important Financial Concepts Characteristics of Contemporary Types of Bonds Bond type Characteristicsa Zero- (or low-)
coupon bonds Issued with no (zero) or a very low coupon (stated interest) rate and sold at a large discount from par. A
significant portion (or all) of the investor’s return comes from gain in value (i.e., par value minus purchase
price). Generally callable at par value. Because the issuer can annually deduct the current year’s interest
accrual without having to pay the interest until the bond matures (or is called), its cash flow each year is
increased by the amount of the tax shield provided by the interest deduction. Junk bonds Debt rated Ba or lower by Moody’s or BB or lower by Standard & Poor’s. Commonly used during the 1980s
by rapidly growing firms to obtain growth capital, most often as a way to finance mergers and takeovers.
High-risk bonds with high yields—often yielding 2% to 3% more than the best-quality corporate debt. Floating-rate
bonds Stated interest rate is adjusted periodically within stated limits in response to changes in specified money
market or capital market rates. Popular when future inflation and interest rates are uncertain. Tend to sell
at close to par because of the automatic adjustment to changing market conditions. Some issues provide
for annual redemption at par at the option of the bondholder. Extendible notes Short maturities, typically 1 to 5 years, that can be renewed for a similar period at the option of holders.
Similar to a floating-rate bond. An issue might be a series of 3-year renewable notes over a period of
15 years; every 3 years, the notes could be extended for another 3 years, at a new rate competitive with
market interest rates at the time of renewal. Putable bonds Bonds that can be redeemed at par (typically, $1,000) at the option of their holder either at specific dates
after the date of issue and every 1 to...
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