Chapter Six

1
Chapter Six

• Fixed-Income Securities Characteristics and
  Valuation

2
Types of Long-Term Debt

• Assets backed or not
• Mortgage bonds (secured debt)
• Debentures (unsecured debt)
• Subordinated
• Unsubordinated
• Senior or junior

3
Other Special Debts

• Collateral trust bonds
• Income bonds
• Equipment trust certificates
• Pollution control bonds

4
Indentures

• Basic terms of the bonds face value, coupon
  rates, maturity
• Total amount of bonds issued
• Repayment arrangements sinking fund
• Description of property used as security
• Call provision
• Protective Covenants
• Trustee

5
Trading Information

• Corporate bonds
• Government debt securities

6
Bond Ratings

• Moody SP
• Junk bonds

7
Debt Financing

• Advantages
• Interest expenses deductible gt lower cost
• Higher return to shareholders
• Maintain control
• Disadvantages
• Increased financial risk
• Possible restrictions by creditors

8
Valuation of Assets

• Capitalization of cash flow

Market value Book value
9
Bond Valuation (1)

• Finite maturity dates
• Annual interest payment
• Semiannual interest payment
• Yield to maturity

10
Bond Valuation (2)

• Perpetual bond

Zero coupon bond
11
Preferred Stock

• Characteristics
• Price, par, and maturity
• Adjustable rate
• Cumulative dividend
• Participation
• Call feature
• Voting rights
• Advantages v.s. disadvantages

12
Preferred Stock Valuation

• Perpetuity

13
Homework

• Page 249-250, question 1, 4, 5, 6, 9, 10, 11, 14,
  16
• Page 252-254, problem 3 (d), 4, 5, 7, 15, 18, 20