Archive for April, 2006
Different Bond Types
April 25th, 2006
There are many different bond types. Bonds are debt securities. Different bond types are issued by the US Government, state and local governments, municipalities, foreign governments, Federal agencies, and corporations. When a corporation issues a bond, it needs to consider which of the different bond types to issue. Corporations must decide whether to issue short term bonds, long term bonds, straight bonds, Convertible Bonds, US bonds, Eurobonds, and also whether to issue the bond privately or publicly.
A company has to constantly consider many different bond types to issue because different bonds types have different characteristics that could have a large impact of the amount of money raised. Many corporations issue, not just one bond type but, many different bond types at any one time. Below are common types of bonds.
| Agency bonds | Bonds issued by agencies such as Ginnie Maes, Freddie Macs or Fannie Maes. Examples are mortgage backed bonds. |
| Asset backed bonds | Bonds backed by accounts receivable or money owed to the issuer. |
| Baby bonds | A baby bond has a par value of less than $1,000. |
| Callable bonds | Bonds that can be called by the issuer to mature earlier than the maturity date. |
| Collateralized mortgage obligations (CMOs) | A CMO is a complex mortgage backed corporate bond. It is similar to agency mortgage backed bonds but its yield is not guaranteed and does not have government backing. |
| Corporate Bonds | Bonds issued by corporations. |
| Convertible Bonds | Bonds that give you the option of converting, or changing into stocks instead of getting a cash repayment. |
| Debentures | The most common type of Corporate Bonds, backed by the credit worthiness of the issuer. |
| General obligation bonds (GOs) | A Go is a Municipal bond, backed by the full faith and credit of the issuer. |
| Junk bonds | The lowest rated Corporate Bonds. |
| Mortgage backed bonds | Bonds backed by a pool of mortgage loans. |
| Prerefunded bonds | High rated Corporate Bonds or municipal bonds whose repayment is guaranteed by a second bond issuer. |
| Revenue bonds | Municipal bonds backed by the revenues of a project. |
| Self amortizing bonds | Each payment of a self amortizing bond includes both the principal and the interest. There is no lump sum repayment at maturity. |
| Senior bonds | Bonds with stronger claims than subordinated bonds. |
| Subordinated bonds | Bonds that will be paid after other loan obligations of the issuer have been met. |
|
War bonds |
Government authorized bonds issued for bad times. |
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Corporate Bonds Par Value
April 23rd, 2006
Question: Corporate Finance Question for an Expert?
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
A. 3.5 percent.
B. greater than 3.5 percent but less than 7 percent.
C. 7 percent.
D. greater than 7 percent.
E. Answer cannot be determined from the information provided.
Any Clue?
Thats really good help but I am looking more for a letter answer...
Answer: Certainly we have a clue.
Let's say the bond had annual payments of 7%. What would the effective annual rate be? Answer: 7%.
But this bond pays interest semianually. So you get half your money six months early. As time is money, when one option pays money earlier than another, it's more valuable. So if annual payments have an effective rate of 7%, semiannual payments have a rate (if you can't fill in the blank here, then corporate finance is not for you).
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