Sells at a premium. Bond spread. The risk that CFs will have to be reinvested in the future at lower rates, reducing income. Buy bonds on open market.Goals To discuss the types of bonds To understand the terms of bonds To understand the types of risks to issuers and investors To understand the changes of value 3 I. It relates to LBO market in s. Bankruptcy and Reorganization When a business becomes insolvent, a firm have to make a decision whether it will restructure Ch11 or liquidate itself Ch7. Could raise money by selling new bonds which pay 7. This makes them more willing to participate in reorganization even though their claims are greatly scaled back. A failure to meet the sinking fund requirement constitutes a default. Therefore, borrowers are willing to pay more, and lenders require more, on callable bonds. YTM is the rate of return earned on a bond held to maturity. Default risk: Risk that issuer will not make interest or principal payments. Long term bonds are exposed to interest rate risks, compared to short term bonds. Most bonds are owned and traded by large financial institutions. Most bonds have a deferred call and a declining call premium. But bonds are often not callable until several years after issues — deferred call call protection. Similar to amortization on a term loan.
Municipal bond insurance: an insurance company guarantees to pay the coupon and principal payments if an issuer defaults.
Characteristics of Bonds Par value: the stated face value of the bond. It include restrictive covenants. Default Risk: Risk of not paying promised amounts 5. Subordinated debenture: a bond paying a claim on assets only after the senior debt has been paid off in the event of liquidation.
This makes them more willing to participate in reorganization even though their claims are greatly scaled back. Default risk: Risk that issuer will not make interest or principal payments.
Bond and their Valuation 2 1.
Most bonds have a deferred call and a declining call premium.