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Chapter 1 (part II) (Coupon payment structures (Credit- linked coupon…
Chapter 1 (part II)
Coupon payment structures
Credit- linked coupon bonds
Payment- in- kind bonds (due to cash flow problems)
Step- up coupon bonds
Deferred coupon bonds (i.e: split coupon): pay no coupon for the first few years but then pay a higher coupon later
Floating- rate notes (quarterly coupon) =>
inverse FRNs
Index- linked bonds
Fixed coupon bonds
Credit risk is affected by
Credit enhancement
Internal: subordination and overcollateralization
External
Bond covenants
Affirmation (positive): issuers are required to do
Negative: issuers are prohibited to do
Seniority ranking (senior > subordinated > junior debt). Secured bonds have lower yield (interest rate) and higher credit quality than unsecured bonds.
Unsecured bonds have no collateral
Asset or collateral backing (physical assets, equipment, mortgage).
MBS (Mortgage- backed securities)
is debt obligation. Mortgage loans are purchased from
originators
such as banks or mortgage companies
Legal and regulatory considerations
Domestic bonds
Foreign bonds
Global bond markets
National bond markets
Eurobond market
: issued
outside jurisdiction
of any single country. The trusts does not keep records of who owns the bond (bearer bonds)
Tax considerations
Municipal bonds are exempt
Capital gain/ loss depends on bond sale price and bond purchase price
Interest income is typically taxed at the ordinary income tax rate
Principle repayment structures
A partially amortized bond
An amortizing bond
A bullet structure
A sinking fund
callable bonds
Bonds with contingency provisions
Callable bonds
Putable bonds:
bondholders
have the right to sell the bond back to the issuer at a pre- determined price on specified dates
Convertible bonds