Here we break them into traditional bonds the basic

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Unformatted text preview: cted ratings of the bond issue, because these ratings affect salability and cost. Popular Types of Bonds Bonds can be classified in a variety of ways. Here we break them into traditional bonds (the basic types that have been around for years) and contemporary bonds (newer, more innovative types). The traditional types of bonds are summarized in terms of their key characteristics and priority of lender’s claim in Table 6.3. Note Hint Note that Moody’s has 9 major ratings; Standard & Poor’s has 10. TABLE 6.2 Moody’s and Standard & Poor’s Bond Ratingsa Standard & Poor’s Moody’s Interpretation Aaa Prime quality AAA Aa High grade AA A Upper medium grade A Baa Medium grade BBB Ba Lower medium grade BB or speculative B From very speculative Bank investment quality Speculative B Speculative Caa Interpretation Ca C to near or in default Lowest grade CCC CC C Income bond D In default aSome ratings may be modified to show relative standing within a major rating category; for example, Moody’s uses numerical modifiers (1, 2, 3), whereas Standard & Poor’s uses plus ( ) and minus ( ) signs. Sources: Moody’s Investors Service, Inc. and Standard & Poor’s Corporation. CHAPTER 6 TABLE 6.3 Interest Rates and Bond Valuation 279 Characteristics and Priority of Lender’s Claim of Traditional Types of Bonds Bond type Characteristics Priority of lender’s claim Debentures Unsecured bonds that only creditworthy firms can issue. Convertible bonds are normally debentures. Claims are the same as those of any general creditor. May have other unsecured bonds subordinated to them. Subordinated debentures Claims are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied. Claim is that of a general creditor but not as good as a senior debt claim. Income bonds Payment of interest is required only when earnings are available. Commonly issued in reorganization of a failing firm. Claim is that of a general creditor. Are not in de...
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