Management 142 – Quiz #2 Reviewer

Classification of Bond

1. Issuer – nature of organization

 Government – local government unites (LGUs)
 Corporation – private companies
 Foreign
 Bond Coupon – unique character
 Bond – certificate of long-term indebtedness; liken to a promissory note (issued by debtor)

 We sell or issue bond, but we are the creditor.

2. Security – collateral (backs the bond)

 Unsecured – with no specific assets pledged
a. Government – taxes are guarantee that the government will be paying.
b. Corporation
 Debentures – signature only
 Subordinated Debenture – if the debenture has no asset; more riskier for the creditor; not
encouraged if the economy is unstable.
 Munis – issued by the municipalities (e.g. toll fees)

 Secured
a. Government
 Revenue Bond – infra fees are used
 Assessment Bond – fees from a group-benefited project are used
b. Corporation
 Mortgage – lands and buildings are used
 Collateral Trust Bond – securities are used
 Equipment Trust Certificates – fleets of physical assets are used

3. Term – original life

 Short Term – 1 year or less (T-Bills)
 Intermediate – 4 to 10 years (T-Notes)
 Long Term – more than 10 years (T-Bonds)

4. Convertibility – exchangeable
a. Convertible – exchanged for securities; more common
b. Exchangeable – for shares in a different firm

 Regular Bond
 Normal Bond – you pay only the interest every year or semiannually; payment of principal will be
at maturity; if the principal is at 10 years, then pay at the end of the 10th year
5. Terms of Payment – Mode
a. Sinking Fund – setting aside principal; required by the bondholder to set aside using the sinking fund
in a trustee bank

b. Serial Bond – series of maturities; partial payment (e.g. 10 million, 1 million/year – 1 coupon with 1
million will be given to the bondholder)
c. Annuities – periodic I & P at maturity; plain vanilla or regulars
d. Balloon Loan – partial irregular amortization; more of term loans than bonds
e. Income Bond – if interest is earned

6. Bond Cash Flows – structure

a. Annuities or Regulars – fixed interest payment and principal at maturity; series of cash flows
b. Zero Coupon – no interest payment and principal at maturity; single cash flow; not paying for the
regular interest; issued by the debtor because it is really in need of money; willing to receive a lower
amount in exchange; issuer may only receive an amount of e.g. discounted for 20% (issuer will
receive 10 million, but will really receive 8 million)
c. Variable Rate – adjustable rate of interest; there is a regular payment of interest which is not fixed and
varies depending on the market index
d. Consols – interest is paid forever; 100 years is considered forever; Walt Disney; discouraged by Bush

7. Registration – ownership recording; how ownership of the bond is recorded

a. Bearer Bond or Coupon Bond – bondholder’s name is not printed; discouraged since it is not know
who to tax; income for the issuer
b. Registered Bond – bondholder’s name is printed
c. Book Entry – ownership is recorded in the accounting books; know the owner

Bond vs. Term Loan

1. Always for a huge amount.

2. For a long-term duration
3. Participated by several creditors

Cost of Financing – payments of the issuer

1. Interest – to bondholder
2. Commission – to the trustee, dealer or transfer agent
3. Printing Expenses – for the instruments and certificates
4. Advertising Cost
5. Filing Fees with SEC – 1/10 x 1% of the total bonded indebtedness

 Bond Issues – aggregate amount of long-term indebtedness divided into smaller units

Parties to the Bond Issue

1. Issuer – debtor
 2. Trustee – intermediary; some trustees act as dealers; they buy the bond and sell it to bondholders
3. Bondholder – creditor

Issuer Trustee
(Debtor) (Intermediary)
Bondholder
(Creditors)
Duties of the Trustee

1. Authenticates
2. Protector of bondholders’ rights
3. Oversees of the terms & conditions – disciplines
4. Transfer agent – it does the recording of the purchase and transfers of bonds from one to another

Instruments of the Bond Issue

1. Bond Certificate
2. Trust Indenture – lengthy document which stipulates all terms and conditions agreed upon by the
issuer and bondholder