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Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

17

Corporate Bonds



17-3

Corporate Bond Basics, II.

Corporate bonds differ from common stock in three

fundamental ways.

Corporate Bonds Common Stock

Represent a creditor¶s

claim on the corporation

Represents an ownershipclaim on the corporation

Promised cash flows

(coupons and principal)

are stated in advance

Amount and timing of dividends may changeat any time

Mostly callable Almost never callable



17-4

Corporate Bond Basics, IV.



17-5

Types of Corporate Bonds

Bonds issued with a standard, relatively simple set of

features are popularly called Plain Vanilla Bonds (or

³bullet´ bonds).

Debentures are unsecured bonds issued by acorporation.

Mortgage bonds are debt secured with a property lien.

Collateral trust bonds are debt secured with financial

collateral.

Equipment trust certificates are shares in a trust with

income from a lease contract.



17-7

Bond Indentures

A Bond indenture is a formal written agreement

between the corporation and the bondholders.

This agreement spells out, in detail, the obligations of the corporation, the rights of the corporation, and the

rights of the bondholders (with respect to the bond

issue.)

In practice, few bond investors read the original

indenture. Instead, they might refer to an indenture

summary provided in the prospectus of the bond

issue.



17-8

Bond Indentures, Cont.

The Trust Indenture Act of 1939 requires that any

bond issue subject to regulation by the Securities and

Exchange Commission (SEC) must have a trustee

appointed to represent the interests of the bondholders.

The Act is available at the SEC website:

± http://www.sec.gov



17-9

Tombstone Ad, Convertible Notes Issue



17-10

Convertible Bond Prices

and Conversion Values



17-12

Event Risk

Event risk is the possibility that the issuing corporation

will experience a significant change in its bond credit

quality.

Example: In October 1992, Marriott Corporation

announced its intention to spin off part of the company.

± The spinoff, called Host Marriott, would acquire most of the

parent company¶s debt and its poorly performing real

estate holdings. ± Holding bonds in Host Marriott is more risky than holding

bonds in Marriott Corporation.



17-14

Preferred Stock

Preferred stock has some of the features of both bondsand common stock.

Typically, preferred stock issues ± Do not grant voting rights to their holders,

± Promise a stream of fixed dividend payments,

± Have no specified maturity but are often callable,

± May have their dividends suspended without setting off abankruptcy process (as long as common stock dividendsare also suspended),

± Cumulate unpaid preferred dividends, and

± May be convertible.



17-15

Corporate Bond Credit Rating Symbols



17-16

High Yield Bonds Quotes



17-20

Chapter Review, II.

Protective Covenants

Event Risk

Bonds Without Indentures

Preferred Stock Adjustable-Rate Bonds and Adjustable-Rate Preferred

Stock

Corporate Bond Credit Ratings

± Why Bond Ratings Are Important High-Yield (Junk) Bonds

Bond Market Trading

chap017 corp bonds

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