CHAPTER THIRTEEN
FIXED-INCOME
ANALYSIS
SAVINGS DEPOSITS
COMMERCIAL BANKS
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their financial products include various fixed-income securities, such as
demand deposits
time deposits
certificates of depositSAVINGS DEPOSITS
COMMERCIAL BANKS
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their financial products include various fixed-income securities, and are
usually insured by a federal agency, such as the Federal Deposit Insurance Corporation, know as the FDICSAVINGS DEPOSITS
OTHER SAVINGS INSTITUTIONS:
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Savings and Loan Companies•
Mutual Savings Banks•
Credit UnionsTHE 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
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commercial paper•
certificates of deposit•
bankers acceptances•
eurodollars•
repurchase agreements (repos)U.S. GOVERNMENT SECURITIES
TYPES OF GOVERNMENT SECURITIES
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U.S. Treasury Bills
issued on a discount basis
maturities up to 52 weeks
sold by auction (bid process)U.S. GOVERNMENT SECURITIES
TYPES OF GOVERNMENT SECURITIES
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U.S. Treasury Notes
longer term than T-bills
from one to ten years
semiannual coupon payments
current owners are registered
issued in denominations of $1000 or more
active secondary marketU.S. GOVERNMENT SECURITIES
TYPES OF GOVERNMENT SECURITIES
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U.S. Treasury Bonds
maturities greater than ten years
denominations in $1,000 or more
some have call provisionsU.S. GOVERNMENT SECURITIES
TYPES OF GOVERNMENT SECURITIES
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U.S. Savings Bonds
nonmarketble and offered only to individuals
Series EE are pure discount bonds
Series HH mature in 20 years with semiannual coupon paymentsU.S. GOVERNMENT SECURITIES
TYPES OF GOVERNMENT SECURITIES
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Zero Coupon Treasury Security Receipts or Coupon stripping
Treasury bonds are purchased and placed in trust with a custodian
sets of receipts issued for each coupon date
another set of receipts issued for certain maturity datsFEDERAL AGENCY SECURITIES
BONDS OF FEDERAL AGENCIES
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Department of Defense•
Export-Import Bank•
Federal Housing Authority•
Postal Service•
Tennessee Valley AuthorityFEDERAL AGENCY SECURITIES
BONDS OF FEDERALLY SPONSORED AGENCIES
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Federal Home Loan Bank•
Federal National Mortgage Association•
Student Loan Mortgage Corporation•
Farm Credit Bank•
Resolution Funding CorporationSTATE AND LOCAL
GOVERNMENT SECURITIES
ISSUING AGENCIES
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States•
Special Districts•
Municipalities, Counties and TownshipsSTATE AND LOCAL
GOVERNMENT SECURITIES
TYPES OF MUNICIPAL BONDS
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General Obligation•
Revenue•
Industrial DevelopmentCORPORATE BONDS
TAX TREATMENT
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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
CORPORATE BONDS
THE INDENTURE
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DEFININTION: a legal document formally describing the terms of the legalrelationship between a bond issuer and bondholders.
CORPORATE BONDS
THE INDENTURE
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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 provisionsCORPORATE BONDS
THE INDENTURE
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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 issuerCORPORATE BONDS
TYPES OF BONDS
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mortgage•
collateral trust•
equipment obligations•
debentures•
income•
guaranteedCORPORATE BONDS
CALL PROVISIONS
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the option to pay off the bond at par at any time prior to maturityCORPORATE BONDS
THE INDENTURE
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Two Kinds of Call Provisions:
no calls in first five years or
call premium is specified in the provision at time of issueCORPORATE BONDS
SINKING FUNDS
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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 marketFOREIGN BONDS
WHAT CONSTITUTES A FOREIGN BOND?
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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.PREFERRED STOCK
DEFINITION: a hybrid form of security that has characteristics of both common stocks and bonds
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similar to a perpetual bond•
receive preferential treatment beforecommon stock in order of dividend payment
