CHAPTER THIRTEEN FIXED-INCOME ANALYSIS
Dec 19, 2015
SAVINGS DEPOSITS
COMMERCIAL BANKS•their financial products include
various fixed-income securities, such asdemand depositstime depositscertificates of deposit
SAVINGS DEPOSITS
COMMERCIAL BANKS•their financial products include
various fixed-income securities, and areusually insured by a federal agency,
such as the Federal Deposit Insurance Corporation, know as the FDIC
SAVINGS DEPOSITS
OTHER SAVINGS INSTITUTIONS:•Savings and Loan Companies
•Mutual Savings Banks
•Credit Unions
THE MONEY MARKET
DEFINITION: a market for buyers and sellers of short-term (less than one year in maturity) financial products
THE MONEY MARKET
MONEY MARKET INSTRUMENTS•commercial paper
•certificates of deposit
•bankers acceptances
•eurodollars
•repurchase agreements (repos)
U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT
SECURITIES•U.S. Treasury Bills
issued on a discount basismaturities up to 52 weekssold by auction (bid process)
U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT SECURITIES
•U.S. Treasury Noteslonger term than T-billsfrom one to ten yearssemiannual coupon paymentscurrent owners are registeredissued in denominations of $1000 or moreactive secondary market
U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT
SECURITIES•U.S. Treasury Bonds
maturities greater than ten yearsdenominations in $1,000 or more some have call provisions
U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT
SECURITIES•U.S. Savings Bonds
nonmarketble and offered only to individuals
Series EE are pure discount bondsSeries HH mature in 20 years with
semiannual coupon payments
U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT SECURITIES
•Zero Coupon Treasury Security Receipts or Coupon strippingTreasury bonds are purchased and placed
in trust with a custodiansets of receipts issued for each coupon
dateanother set of receipts issued for certain
maturity dats
FEDERAL AGENCY SECURITIES BONDS OF FEDERAL AGENCIES
•Department of Defense
•Export-Import Bank
•Federal Housing Authority
•Postal Service
•Tennessee Valley Authority
FEDERAL AGENCY SECURITIES BONDS OF FEDERALLY
SPONSORED AGENCIES•Federal Home Loan Bank
•Federal National Mortgage Association
•Student Loan Mortgage Corporation
•Farm Credit Bank
•Resolution Funding Corporation
STATE AND LOCAL GOVERNMENT SECURITIES ISSUING AGENCIES
•States
•Special Districts
•Municipalities, Counties and Townships
STATE AND LOCAL GOVERNMENT SECURITIES TYPES OF MUNICIPAL BONDS
•General Obligation
•Revenue
•Industrial Development
CORPORATE BONDS
TAX TREATMENT•How is the income from a bond treated
in the tax return of the corporation?discount basis
– discount taxed as ordinary income by federal government
coupon basis– coupon taxed annually– interest payments by corporation considered
expenses to reduce taxable income
CORPORATE BONDS
THE INDENTURE•DEFININTION: a legal document
formally describing the terms of the legal relationship between a bond issuer and bondholders.
CORPORATE BONDS
THE INDENTURE•The Trustee
acts to protect the intersts of bondholders
facilitates communications between them and the issuer
the indenture promises the trustee that it will comply with a number of stated provisions
CORPORATE BONDS
THE INDENTURE•includes other terms such as the sale
of assets, issuance of other bonds, dividends payment changes, and other issues that may change the profitability and solvency of the issuer
CORPORATE BONDS
TYPES OF BONDS•mortgage
•collateral trust
•equipment obligations
•debentures
•income
•guaranteed
CORPORATE BONDS
THE INDENTURE•Two Kinds of Call Provisions:
no calls in first five years orcall premium is specified in the provision
at time of issue
CORPORATE BONDS
SINKING FUNDS•requires issuer to make annual
payments to a fund
•the fund pays part of the principal each year
•trustee may also repurchase bonds in the open market
FOREIGN BONDS
WHAT CONSTITUTES A FOREIGN BOND?•DEFINITION: foreign bonds are bond
offered in another currency outside the issuers country of origin
•Example:a yankee bond is a foreign bond issued
in the U.S. by a Canadian firm denominated in U.S. dollars
PREFERRED STOCK
DEFINITION: a hybrid form of security that has characteristics of both common stocks and bonds•similar to a perpetual bond
•receive preferential treatment before common stock in order of dividend payment
•unpaid dividends usually accumulate
•some are convertible to common stock