CHAPTER NINETEEN TYPES OF FIXED-INCOME ANALYSIS

SAVINGS DEPOSITS
COMMERCIAL BANKS
their financial products include various fixedincome securities, and are
usually insured by a federal agency, such as the Federal Deposit Insurance Corporation, known 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 basis maturities up to 52 weeks sold by auction (bid process)

U.S. GOVERNMENT SECURITIES

TYPES OF GOVERNMENT SECURITIES
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 market
7

U.S. GOVERNMENT SECURITIES

TYPES OF GOVERNMENT SECURITIES
U.S. Treasury Bonds
maturities greater than ten years denominations 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 bonds Series HH mature in 20 years with semiannual coupon payments

U.S. GOVERNMENT SECURITIES

TYPES OF GOVERNMENT SECURITIES
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 dats

10

FEDERAL AGENCY SECURITIES

BONDS OF FEDERAL AGENCIES
Department of Defense Export-Import Bank Federal Housing Authority Postal Service Tennessee Valley Authority

11

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
12

STATE AND LOCAL GOVERNMENT SECURITIES

ISSUING AGENCIES
States Special Districts Municipalities, Counties and Townships

13

STATE AND LOCAL GOVERNMENT SECURITIES

TYPES OF MUNICIPAL BONDS
General Obligation Revenue Industrial Development

14

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
15

CORPORATE BONDS
THE INDENTURE
DEFININTION: a legal document formally describing the terms of the legal relationship between a bond issuer and bondholders.

16

CORPORATE BONDS
THE INDENTURE
The Trustee
acts to protect the interests of bondholders facilitates communications between them and the issuer the indenture promises the trustee that it will comply with a number of stated provisions

17

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

18

CORPORATE BONDS
TYPES OF BONDS
mortgage collateral trust equipment obligations debentures income guaranteed
19

CORPORATE BONDS
CALL PROVISIONS
the option to pay off the bond at par at any time prior to maturity

20

CORPORATE BONDS
THE INDENTURE
Two Kinds of Call Provisions:
no calls in first five years or call premium is specified in the provision at time of issue

21

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

22

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 denominated in U.S. dollars issued in the U.S. by a Canadian firm
23

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
24