corporate debt securities outline

trading flat

1. bond issuer is not paying interest to the bondholders of the corporation
2. in secondary market, the bond buyer and seller will agree to a price without extra consideration of interest payments
3. all adjustment bonds-do not trade with accrued interest because corporation cannot assure bondholders interest will be paid

An investor is looking for steady income and relative protection of principal. As a registered rep, which of the following bonds would you not recommend?

•  Income bond. An income bond only pays interest if the corporation produces net income. Corporations that are having financial difficulties-those nearing bankruptcy or in a financial reorganization and cannot pay interest to bondholders change their existing bonds into income bonds with bondholder's approval

Callable bonds

1. issuer can repurchase from owner at a stated call price and date before maturity
2. if corporation calls back bond, interest payments aren't paid after call date
3. issuing corporation can recall bond
4. holder of bond cannot recall bond
5. call premium, corporations compensate holder's loss of future interest-provide owners up to one year's worth of interest
6. allows a corporation to "refund" its debt at a lower interest rate
7. refunding issue, paying off outstanding bonds with the proceeds of a new issue
8. funded debt, what bonds are called
9. refunding,refinancing,  funding the debt over again
10. bond indenture, states the method by which the bond will be called
11. bond indenture, states earliest date the bond may be called

Call protection

1. method of protecting investors who bought corporate bonds
2. issuing corporation agrees bonds cannot be called for a certain period of time ex. 5 years
3. corporations tend to call outstanding bonds when interest rates are falling
4. longer periods of call protection are more valuable to buyers

Convertible bonds 

1. bondholder can convert bond into shares of common stock 
2. the amount of shares of each bond may be converted into the equivalent value of the stock per share (conversion price) and when bondholders may exercise their conversion price
3. if a corporation does well and price of stock rises above fixed conversion price bondholders may exercise option
4. forced conversion, if the stock has increased above conversion price and corporation calls bonds, holders convert them into stock instead of accepting the call price. 
5. if a company declares a stock split, conversion price of the bond is lowered to compensate holder for the extra number of shares and decrease in price of shares after split
6. antidilution clause, ensures company will always increase the conversion ratio and decrease the conversion price
7. new price after stock split will be the reciprocal of the stock split. 3 for 2 stock split>the new conversion price will be 2/3 of the old conversion price

A company has issued bonds to expand its business. Which of the following bonds would a company issue that would allow the company to force the bondholders to change the bond into common stock? 

• callable, convertible bonds. A convertible bond does not allow the company to force the conversion. Bonds must also be callable to permit the corporation to force the conversion. By making the bonds callable, the company can "force" the conversion by calling the bonds at face value when they are very high in price causing bondholders to redeem bonds or lose a lot of $.