BONDS

A bond is defined as a long term debt of a firm or government set forth in writing and
made under seal.
Kinds of bond
There are kinds of bods.
Government bonds; and
Corporate bonds.
Kinds of bond
Government bonds
Are those issued by the government to finance its activities.
Corporate bonds
Are those issued by private corporation to finance their long-term funding
requirements.
Bonds as distinguished from stocks
As distinguished from stocks, bonds posses the following characteristics.
1. A bond is a debt instrument, while stock is an instrument of
ownership.
2. Bondholders have priority over stockholders when payment are
made by the company.
3. Interest payment due to bonds are fixed, while dividends to
stockholders are contingent upon earning and must be declare by
board of directors.
4. Bonds have specific maturity date, at which time repayment of the
principal is due. In contrast, stocks are not have maturity dates;
and
5. Bondholders have no vote and no influence on the management
of the firm, except when the provisions of the bond and the
indenture agreement are not met.

ALTERNATIVE WAYS OF BOND ISSUANCE

Corporate bonds are generally sold by medium-and-large-sized company to finance
plant and equipment. Small firms do not usually use this finance method.
Bonds are issues through any of the following ways:
1. Public offering; and

2. Private placement.
BOND ISSUANCE
Public offering
Involves selling of corporate bonds to the general public through investment bankers.
These investment banker provides assistance in the issuance of the bonds by:
1. Helping the firm determine the size of the issue and the type of
bonds to be issued;
2. Establish the selling price; and
3. Selling issue.
Private placement
Is a sale of bonds directly to an institution and is a private agreement between the
issuing company and the financial institution with out public examination.
Private placement offers the following advantages.
1. The issue can be tailor-made to fit the needs of the issuing firm,
as well as the investing firm;
2. The issue does not have to be registered; and
3. There are no underwriting fees paid by the issuing firm.
CLASSES OF BONDS

By major contractual provision, bonds may be classified into

three general types:

by type of security;
by manner of the participation in earning; and
by method of retirement or repayment.
Classification of bond as to Type of security
1. Earning and general unpledged assets of issuing company (debentures);
2. Earning of issuing company plus pledge of specific property (mortgage
bonds). This is further classified as follows:
a) Real state mortgages (senior and junior liens)
i.

Closes-end issues

ii.

Open-end mortgages

b) Chattel mortgages
3. All or some of original security plus general credit or another company which
may be:
a) Assumed bonds

b) Guaranteed bonds
4. Combined earnings of allied companies plus collateral protection in some
cases (joint bonds).
Classification of bond as to Type of security
Debentures.
Debentures bonds are general credit bonds not secured by specific property.
Mortgage bonds
Mortgage bonds are those which are secured by a lien on specifically named
such as land, building, equipment, and other assets.
Specific property pledge are of two general types:
1. Real state which consist of land and property attach to the
land.
2. Chattels which consist of personal and movable propety.
Figure 10.

classes of bond as to Type of security

Classification of bond as to Type of security

Real estate mortgage may also be classified according to priority claims:
1. Senior liens. They are those having prior claim to fixed assets
pledge as security. Bonds with senior lines sometimes called first
mortgage bonds.
2. Junior liens. They are bonds having subsequent lines to fixed
assets pledge as security. They have a subordinate priority claim
to the senior liens. Bonds with senior liens are also sometimes
called second mortgage or third mortgage bonds.
Real estate mortgages may also be classified according to the type of issue:
1. Closed-end issues. This type of issue refers to those wherein
subsequent issues on the specific property pledge as a collateral
are not allowed.
2. Open-end issues. This type of bond issue permits the issuance of
additional bond issues or series to be made under original
mortgage secured by a single lien.
3. Limited open-end issues. This is an improvement of the open and
closed issues allowing additional bonds to be sold after maximum
amount.
4.

Classification of bond as to Type of security

Assumed bonds
There are times when a corporation buys another corporation, or is merged
with another. The liabilities of the deceased corporation are assumed by the
surviving corporation.
Guaranteed bonds
A guaranteed bond is a type of bond in which the payment of interest or
principal, or both is guaranteed by one or more individuals or corporation.
Joint bonds
There are times when a property is owned jointly by several companies.
Classification of bonds by method of participation in earnings
Bonds may be classified according to the method of participation in earning of the
company. The classification are as follows:
Bonds with fixed contractual rate with payment contingent upon earning (income
bonds).
1. coupon bonds; and
2. registered bonds.
Bonds with fixed contractual rate with participating feature of which there are four
types.
1. Participating bonds;
2. Convertible bonds;
3. Bonds with warrants; and
4. Bonds with security attach.

Figure 11. classes of bonds by manner of participation in earning

Classification of bonds by method of participation in earnings
Coupon Bonds
These bonds are also referred to as bearer bonds.
Register Bonds
Income Bonds
Participating Bonds
Convertible Bonds
Bonds with Warrants
Warrants may be detachable or non-detachable.

Bonds with Junior Security Attached.

These are bonds which are issued along with some shares of stocks in a
package or block sale.
Figure 12. classes of bonds by method of retirement
Classification by method of retirement
Bonds also classified according to the method of retirement.
Serial Bonds. A serial bond is one among a group of bounds a part of which
mature semi-annually or annually instead of all on a single date.
Sinking Fund Bonds. Bonds may also be gradually retired with the provision of
sinking fund.
Callable Bonds. These are bonds with provision that the terms of the issue can
be cancelled or called.
Convertible Bonds. These are bonds which may be exchange for the common
stock the issuing corporation at fixed price, at a pre-determined redemption
date, and at the option of the bondholder.
Perpetual Bonds. These are bonds which cannot be redeemed by demanding
repayment.
Reasons for the use of bonds
Bonds are used as instrument of long-term financing for any of the following reasons:
1. When a fancies or a license is issued to a corporation providing a
guarantee of a certain return on capital investment;
2. When economic conditions allow the payment of interest at a rate
lower than what is paid to common stock in the form of dividends;
3. When the present owners of the corporation want to retain their
share of the voting power;
4. When investor resistance to the purchase of common stock is
very strong; and when such resistance is not the sale of bonds;
5. When the degree of safety offered by the issue attracts investors;
6. When tax advantages are derived from the exercise; and
7. When there is a sufficient demand from institutional investors like
banks, insurance companies, and pre-need firms.

The indenture and trustee

In the study of bond issue, two terms are important; (1) the
indenture; and (2) the trustee. Both perform the common function
of protecting the bond holders.

The Indenture

Is a contract between the corporation and the trustee on

behalf of the bondholders.

The trustee

is a person who handlers monies or property on ehalf in a

trust.

The indenture and trustee

The Indenture
The trustee

BONDS
CORPORATE BONDS

Presented by:
Soria, Geraldin C.
Pioquinto, Deo Mhar A.
Borres, Sorick D.

Present to:
Veronica Abucay, MBA/DBA