2. Updated WSO Technical Guide

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Buyer: Gena Jiang ([email protected]) Transaction ID: 83G76986JA281445G
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Page 44 What is the order of creditor preference in the event of a company’s bankruptcy? The order of preference is shown in the chart below. Those at the top of the pyramid have rights to the firm’s assets in the event of a liquidation before those below them. The first creditors to get paid in the event of liquidation would be the senior debt holders. These are usually banks, or senior bondholders. Usually they have some of the firm’s assets as collateral. Then comes those holding subordinated debt, followed by preferred stockholders. Common stockholders have the absolute last rights to any assets in the event of liquidation or bankruptcy. Why could two bonds with the same maturity, same coupon, from the same issuer be trading at different prices? One of the bonds could be callable One of the bonds could be putable One of the bonds could be convertible There are a few reasons why they could be trading at different prices. A bond that is putable or convertible demands a premium, and a callable bond will trade at a discount. Senior Debt Subordinated Debt Preferred Stock Common Stock Buyer: Gena Jiang ([email protected]) Transaction ID: 83G76986JA281445G
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Page 45 What are bond ratings? A bond rating is a grade that is given to a bond depending on their risk of defaulting. The three most well known and trusted ratings agencies are Standard & Poor’s, Moody’s and Fitch. The lower the grade, the more speculative the stock, and all else equal, the higher the yield. Bond ratings are a grade given to a bond based on its risk of defaulting. These ratings are issued by independent firms and are updated over the life of the bond. They range from AAA which are highly rated “investment grade” bonds with a low default risk, to C, which means the bond is “non-investment grade” or “junk” or even D which means the bond is actually in default and not making payments. •AAA - AA (S&P) •Aaa, Aa1-Aa2 (Moody's) •AAA - AA (Fitch) Investment Grade •AA - BBB (S&P) •Aa3 - Baa2 (Moody's) •AA - BBB (Fitch) Medium Grade •BBB - CCC- (S&P) •Baa3 - Ca (Moody's) •BBB- - CCC (Fitch) Non-Investment "Junk" •D (S&P) •C (Moody's) •DDD - D (Fitch) In Default Buyer: Gena Jiang ([email protected]) Transaction ID: 83G76986JA281445G
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Page 46 Intermediate What is the yield to maturity on a bond? The yield to maturity is the rate of return on a bond if it is purchased today for its current price and held through its maturity date. Normally, the yield to maturity is expressed at an annual rate. The calculation of YTM includes the current market price, the par value, the coupon payments and the time to maturity. In calculating YTM you also assume that the coupon payments are reinvested at the same rate.
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