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Bonds and Their Valuation Paper

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NOTE 8: BONDS AND THEIR VALUATION • Bond Features • Bond Valuation • Bond Ratings • Types of Bonds • Bond Markets I. Bond Features Bond -- evidence of debt issued by a corporation or a governmental body. A bond represents a loan made by investors to the issuer. In return for his/her money, the investor receives a legal claim on future cash flows of the borrower. The issuer promises to make regular coupon payments every period until the bond matures, and pay the face/par/maturity value of the bond when it matures. Default -- since the above mentioned promises are contractual obligations, an issuer who fails to keep them is subject to legal action on behalf of the lenders (bondholders). n Terminology and Characteristics of Bonds The bond indenture is a three-party contract between the bond issuer, the bondholders, and the trustee. The trustee is hired by the issuer to protect the bondholders’ interests. (What do you think would happen if an issuer refused to hire a trustee?) The indenture includes: o The basic terms of the bond issue o The total amount of bonds issued o A description of the security o The repayment arrangements o The call provisions -- A provision that permits an issuer of bonds (and sometimes preferred stock) to retire the obligation prior to its maturity. o Details of the protective covenants (Restrictive provisions) (1) prohibitions on the sale of accounts receivable, (2) constraints on the issuance of common stock divide ...
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