First Slide:

What is Bonds long term debt instrument issued by firms

Purpose of Bonds -seek to raise money

For example a certain company plans to expand and the budget for expansion is 100M but the company
only has 10M in cash and 20M on credit.

What corporate and business do to

Get Cash Quickly

Develop New Products

Fund Construction

*borrow money and promis to repay it in future ...

Is to avail Corporate Bonds

How does Corporate Bonds work?

So the company borrowed certain amount of money and promises to repay it in the future.

Debt security which is bonds is issued by a firm and sold to investors. The company gets the capital it
needs and in return the investor is paid a pre-established number of interest payments at either a fixed
or variable interest rate. When the bond expires, or "reaches maturity," the payments cease and the
original investment is returned.

Bond Rating

Independent agencies such as Moody’s, Fitch, and Standard & Poor’s evaluates bonds.

A bond rating is a letter-based credit scoring scheme used to judge the quality and creditworthiness of a
bond.

Why Consider

assess the riskiness of publicly traded bond issues.

The purpose of bond rating alerts investors to the quality and stability of the bond.

Common Types of Bonds

Traditional bonds

Already well known types of bonds

Or bonds that are commonly used for a long time.

Contemporary Bonds

Modern.

Improvised to suit it to investors preference

It is more innovative

SECURED BONDS

Secured=Binded

Collateral

Can be called “Senior Security Bond” means higher priority claim

If a company distributes bonds, you would be first in line

If a company default or goes bankrupt, you would much likely be the first to claim

We’ll discuss further how claims would work

Why Collateralize Bonds?

The purpose of collateralizing a bond is that if the issuer withdraws and fails to provide interest
or principal payments, the investors may be able to get their money back because they have a
claim on the issuer’s assets.

a. Mortgage Bonds- Secured by real-estate or buildings; holders have a claim on the

real estate assets as its collateral.

Priority of lender’s claim: Claim is on proceeds from sale of mortgaged assets; if not

fully satisfied, the lender becomes a general creditor. The first-mortgage claim must

be fully satisfied before distribution of proceeds to second mortgage holders, and so

on.

Proceeds: Money obtained from a certain event

General Creditor: has become owed of an uncollateralized debt.

*A number of mortgages can be issued against the same collateral.

 b. Collateral Trust Bonds- this bond includes the investment holdings of the issuer as

collateral.

Stocks

Priority of lender’s claim: Claim is on proceeds from stock and (or) bond; if not fully

satisfied, the lender becomes a general creditor.

What is General Creditor?

-An individual to whom money is due from a debtor, but whose debt is not secured by property

of the debtor. One to whom property has not been pledged to satisfy a debt in the event of

nonpayment by the individual owing the money.

- As a general creditor, you have to stand in line after creditors such as the Internal Revenue

Service and the banks.

-Someone na nautangan or nahiraman ng pera

c. Equipment Trust Certificates- refers to a debt instrument that allows a company to

take possession of and enjoy the use of an asset while paying for it over time.

Investors supply capital by buying certificates, allowing a trust to be set up to

purchase assets that are then leased to companies

- These bonds were frequently used by railroads and airlines to finance rolling stock

and aircraft, respectively.

Note: Cannot be issued by equipment manufacturer, only by equipment users.

 What are Considered Rolling Stocks?

-is defined in the Buy America regulations (49 CFR Part 661.3) as: "transit vehicles such

as buses, vans, cars, railcars, locomotives, trolley cars and buses, and ferry boats, as well

as vehicles used for support services."

But ETC doesnt limit only to rolling stock, it was only known as rolling stock bond

because commonly ginagamit ito ng mga company that owns rolling stock.....

YOU COULD ALSO COLLATERALIZE MACHINERY ETC

 After the debt is satisfied, the asset's title is transferred to the company.

Priority of lender’s claim: Claim is on proceeds from the sale of the asset; if proceeds

do not satisfy outstanding debt, trust certificate lenders become general creditors.
1. Unsecured Bonds

-In other words, the investor has the issuer’s promise to repay but has no claim on

specific collateral.

NOT COLLATERAL BUT THE PROMISE

a. Debentures- senior to subordinated debentures=higher priority than subordinated

this bond has no collateral associated with it. A variation is the subordinated

debenture, which has junior rights to collateral.

WHY PEOPLE INVEST IN THIS? UNSECURED

Because the issuer of these bonds are commonly governments

Priority of lender’s claim: Claims are the same of any general creditor.

b. Subordinated Debentures- most junior=below rank, to debts but senior to

stocks(below); more senior loans or securities with respect to claims on assets or

earning

 Since subordinated debt is risky, it's important for potential lenders

to be mindful of a company's solvency(ability to pay once debt),
other debt obligations, and total assets when reviewing an issued
bond. Although subordinated debt is riskier for lenders, it's still paid
out prior to any equity holders. Bondholders of subordinated debt
are also able to realize a higher rate of interest to compensate for
the potential risk of default

 Subordinated debt is any debt that falls under, or behind, senior

debt. However, subordinated debt does have priority over preferred
and common equity. Examples of subordinated debt include
mezzanine debt, which is debt that also includes an investment.
Priority of lender’s claim: Claim is that of general creditor but not as good as a senior

debt claim.
 Explanation Subordinated debentures are thus also known as junior

securities. In the case of borrower default, creditors who own

subordinated debt will not be paid out until after senior bondholders

are paid in full.

MECHANICS IN REPAYMENT

The bankrupt company's liquidated assets will first be used to pay the
unsubordinated debt. Any cash in excess of the unsubordinated debt
(secured, collateralized) will then be allocated to the subordinated debt.
Holders of subordinated debt will be fully repaid if there is enough cash
on hand for repayment. It's also possible that subordinated debt holders
will receive either a partial payment or no payment at all.1

*Higher seniority bonds and securities enjoy a higher recovery rate than subordinate instruments.

c. Income Bonds-The issuer is only obligated to make interest payments to bond holders

if the issuer or a specific project earns a profit. If the bond terms allow for cumulative

interest, then the unpaid interest will accumulate until such time as there is sufficient

income to pay the amounts owed.

*IF A traditional corporate bond is one that makes regular interest

payments to bondholders and upon maturity, repays the principal

investment.

BUT IN INCOME BONDS when a bond issuer does not guarantee

coupon payments.

NO CONSISTENCY IN PAYMENTS
 The face value upon maturity is guaranteed to be repaid, but the interest

payments will only be paid depending on the earnings of the issuer over a

period of time.

Priority of lender’s claim: Claim is that of a general creditor; Are not in default when

interest payments are missed, because they are contingent(DEPENDENT) only on

earnings being available.

MISSED DOESNT ENTIRELY MEANS WITHDRAWING

DEFAULT MEANS WITHDRAWING

Characteristics of Contemporary Types of Bonds

1. Zero- (or low-) Coupon Bonds- No or very low interest is paid on this type of bond.

Instead, investors buy the bonds at large discounts to their face values in order to earn

an effective interest rate. A significant portion (or all) of the investor’s return comes

from gain in value (that is, par value minus purchase price). Generally

callable(designating a bond that can be paid off earlier than the maturity date.) 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.

zero-coupon bond is a debt security that does not pay interest but instead trades

at a deep discount, rendering a profit at maturity, when the bond is redeemed

for its full face value.

The price of a zero coupon bond can be calculated as:

Price = M / (1 + r)n

where M = Maturity value or face value of the bond

r = required rate of interest

n = number of years until maturity

If an investor wishes to make a 6% return on a bond, with $25,000

par value, that's due to mature in three years, he will be willing to
pay the following:

$25,000 / (1 + 0.06)3 = $20,991.

If the debtor accepts this offer, the bond will be sold to the investor
at $20,991 / $25,000 = 84% of the face value. Upon maturity, the
investor gains $25,000 - $20,991 = $4,009, which translates to 6%
interest per year.

The greater the length of time until the bond matures, the less the
investor pays for it, and vice versa. The maturity dates on zero
coupon bonds are usually long term, with initial maturities of at
least 10 years. These long-term maturity dates let investors plan
for long-range goals, such as saving for a child’s college education.
With the bond's deep discount, an investor can put up a small
amount of money that can grow over time.

2. Junk Bonds- Debt rated Ba( lower medum grade or speculative) or lower by

Moody’s or BB (speculative) or lower by Standard & Poor’s. Commonly used 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.

Junk bonds.
- Junk bonds are corporate bonds whose issuers are regarded by bond credit rating
agencies as being of high risk.
 COMPANYS WHO ISSUES THIS ARE MOSTLY GOIN BANKRUPT OR

DEAFAULT IN BUSINESS

 A junk bond is debt that has been given a low credit rating by a
ratings agency, below investment grade.
 As a result, these bonds are riskier since chances that the
issuer will default or experience a credit event are higher.
 Because of the higher risk, investors are compensated with
higher interest rates, which is why junk bonds are also called
high-yield bonds.

*Junk bonds can be broken down into two other categories:

Fallen Angels – This is a bond that was once investment grade but has since been

reduced to junk-bond status because of the issuing company's poor credit quality.

Rising Stars – The opposite of a fallen angel, this is a bond with a rating that has

been increased because of the issuing company's improving credit quality. A rising

star may still be a junk bond, but it's on its way to being investment quality.

(REEDEMING ITSELF)

*Bond Rating is a grade given to a bond by a rating service that indicates its credit quality. The

rating takes into consideration a bond issuer's financial strength or its ability to pay a bond's

principal and interest in a timely fashion.

*Moody's, Standard and Poor's, Fitch Ratings, and DBRS are some of the most internationally

well-known bond-rating agencies.

Pros
 Junk bonds return higher yields than most other fixed-income debt
securities.
 Junk bonds have the potential of significant price increases should the
company's financial situation improve.
 Junk bonds serve as a risk indicator of when investors are willing to take
on risk or avoid risk in the market.

Cons
 Junk bonds have a higher risk of default than most bonds with better credit
ratings.
 Junk bond prices can exhibit volatility due to uncertainty surrounding the
issuer's financial performance.
 Active junk bond markets can indicate an overbought market meaning
investors are too complacent with risk and may lead to market downturns.

WHO WOULD INVEST IN THIS?

-PEOPLE WHO ARE COMFORTABLE WITH RISK

One of the things that can make junk bonds a potentially useful asset for diversifying
your portfolio is that a bond’s price, a key component of rate of return, moves counter-
cyclically with the economy.

When the economy is strong, the rates of returns on junk bonds are often low. That’s
because during such times investors tend to sell bonds and buy stocks. That lowers the
price of bonds.

 For example, if investors believe economic conditions are improving in the

U.S. or abroad, they might purchase junk bonds of companies that will
show improvement along with the economy.

As a result, increased buying interest of junk bonds serves as a market-risk

indicator for some investors. If investors are buying junk bonds, market
participants are willing to take on more risk due to a perceived improving
economy. Conversely, if junk bonds are selling off with prices falling, it usually
means that investors are more risk averse and are opting for more secure and
stable investments.

 For example, as the fall of 2019 came to an end, junk bonds were posting an
average yield of 5.75%, as measured by the Merrill Lynch US High Yield Master
II Index, a common benchmark. This relatively modest return reflected the strong
underlying economy.
 A strong economy can also lower default rates because bond issuers are operating in a
more benign environment. In 2018, bonds, except those already in default, had a default
rate that ranged from less than 1% to 0%.

On the other hand, when the economy is weak the rates of returns on junk bonds often
rise. That’s because their yield, another key component of rate of return, soars. During
the Great Recession, which began in December 2007 and ended in June 2009, junk
bond yields shot up: In December 2008 the average yield peaked at a lofty 23.26%.
This offered investors a full quarter on the dollar … if they could stomach the market in
a year when even AA bonds began defaulting on their loans.

As with default rates, return rates on junk bonds vary by the issuer’s credit worthiness.
At the time of writing, for example, AA-rated bonds had a 2.310% average yield over a
one-year period. In that same time CCC-rated bonds offered 12.699%. As always,
investors willing to roll the dice can make much more.

3. 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.

- is a debt instrument with a variable interest rate.

FRNs are susceptible (most likely) to default risk, which occurs when

the company or government can't pay back the principal or original

amount that was paid by the investor.

Pros
 Floating rate notes allow investors to benefit from rising rates as the FRN's
rate adjusts to the market
 FRNs are impacted less by price volatility (change rapidly)
 FRNs are available in U.S. Treasuries and corporate bonds

Cons
 FRNs may still have interest rate risk if market rates rise to a greater extent
than the rate resets
 FRNs can have default risk if the issuing company or corporation can't pay
back the principal
 If market interest rates fall, the FRN rates may fall as well
 FRNs typically pay a lower rate than their fixed-rate counterparts

Floating rate notes (FRNs).

- These are corporate bonds where the coupon can be adjusted at pre-determined
intervals. The adjustment will be made by reference to some benchmark rate,
specified when the bond is first issued. FRNs are, in part, a response to high and
variable inflation rates.
4. Extendible Notes- also known as extendible bonds, is a long-term debt security that

includes an option to lengthen its maturity period

-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.

5. Putable Bonds- Also known as put bonds, is a debt instrument with an embedded

option that gives bondholders the right to demand early repayment of the principal

from the issuer.

-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 5 years thereafter or when

and if the firm takes specified actions, such as being acquired, acquiring another

company, or issuing a large amount of additional debt. In return for its conferring the

right to “put the bond” at specified times or when the firm takes certain actions, the

bond’s yield is lower than that of a non-putable bond.

 *(put bond, putable or retractable bond) is a bond with an embedded put option. The

holder of the puttable bond has the right, but not the obligation, to demand early

repayment of the principal. The put option is exercisable on one or more specified

dates.[

Putable bonds can be sold back to the issuer on specified dates, prior to the
redemption date.

Note: The claims of lenders (that is, bondholders) against issuers of each of these types of bonds

vary, depending on the bonds’ other features. Each of these bonds can be unsecured or secured.

International Bond Issues

Companies and governments borrow internationally by issuing bonds in two principal financial

markets: the Eurobond market and the foreign bond market.

a. Eurobond- A bond issued by an international borrower and sold to investors in countries

with currencies other than the currency in which the bond is denominated.

A Eurobond is a debt instrument that's denominated in a currency

other than the home currency of the country or market in which it is

issued. Eurobonds are frequently grouped together by the currency

in which they are denominated, such as eurodollar or Euro-yen

bonds. Since Eurobonds are issued in an external currency, they're

often called external bonds. Eurobonds are important because they

help organizations raise capital while having the flexibility to issue

them in another currency.

 Eurobonds.
- Eurobonds are bonds issued in a country other than that of the currency of
denomination. Thus bonds issued in US dollars in London are eurobonds, as are yen
bonds issued in New York. The bonds themselves may be straights, that is fixed-
interest, fixed redemption bonds like the sterling ones described above, or they may
come in any of the variations listed here.

Euro bonds.
- These are bonds denominated in euros and issued in the euro currency area. If bonds
denominated in euros would be issued outside the euro currency area, they would be
euro eurobonds.

b. Foreign Bond- is issued by a foreign corporation or government and is denominated-

most recognized- face value...in the investor’s home currency and sold in the investor’s

home market.

Foreign bonds.
- These are corporate bonds, issued in the country of denomination, by a firm based
outside that country. Thus, a US firm might issue a sterling bond in London.

Floating rate notes (FRNs).

- These are corporate bonds where the coupon can be adjusted at pre-determined
intervals. The adjustment will be made by reference to some benchmark rate,
specified when the bond is first issued. FRNs are, in part, a response to high and
variable inflation rates.
A foreign bond is a bond issued in a domestic market by a foreign

entity in the domestic market's currency as a means of raising

capital.

c. Examples of Foreign Bonds

d. A bulldog bond is issued in the United Kingdom, in British pound
sterling, by a foreign bank or corporation. Foreign corporations
raising funds in the United Kingdom typically issue the bonds when
 interest rates in the United Kingdom are lower than those in the
corporation’s country.
e. A Matilda bond is a bond issued in the Australian market by a non-
Australian company. For example, in June 2016, Apple Inc. sold
$1.4 billion in notes maturing in June 2020, January 2024 and June
2026. Apple joined other companies such as Qantas Airways Ltd.,
Coca-Cola Co. and Asciano Ltd. in selling securities past the
seven-year mark that had been the limit for many nonfinancial
corporate borrowers in recent years.
f. A samurai bond is a corporate bond issued in Japan by a non-
Japanese company. In May 2016, French bank Societe Generale
SA sold $1.1 billion in samurai bonds, including senior and
subordinated bonds maturing in seven years. The sale followed
Bank of America Corporation’s $1.08 billion offering in a euro-
yen format earlier that month.

Other Types of Bonds

Convertible Bond- This bond can be converted into the common stock of the issuer at a

predetermined conversion ratio.

Convertible bonds.
- These are usually corporate bonds, issued with the option for holders to convert into
some other asset on specified terms at a future date. Conversion is usually into
equities in the firm, though it may sometimes be into floating rate notes.

Deferred Interest Bond- This bond offers little or no interest at the start of the bond term, and

more interest near the end. The format is useful for businesses currently having little cash with

which to pay interest.

Guaranteed Bond- The payments associated with this bond are guaranteed by a third party,

which can result in a lower effective interest rate for the issuer.
Serial bond- This bond is gradually paid off in each successive year, so the total amount of debt

outstanding is gradually reduced.

Variable Rate Bond- The interest rate paid on this bond varies with a baseline indicator, such as

LIBOR-which stands for London Interbank Offered Rate, serves as a globally accepted key

benchmark interest rate that indicates borrowing costs between banks

Zero Coupon Convertible Bond- This variation on the zero coupon bond allows investors to

convert their bond holdings into the common stock of the issuer. This allows investors to take

advantage of a run-up in the price of a company's stock. The conversion option can increase the

price that investors are willing to pay for this type of bond.