You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on description given in the table that follows: Description These bonds are backed by real estate holdings and equipment, and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets. These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. Type of Bond Subordinated debentures Based on your understanding of bond ratings and bond-rating criteria, which of the following sta O BBB bonds usually have the lowest yields in the bond markets. Senior mortgage bonds Subordinated debentures Debentures Junior mortgage bonds
You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on description given in the table that follows: Description These bonds are backed by real estate holdings and equipment, and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets. These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. Type of Bond Subordinated debentures Based on your understanding of bond ratings and bond-rating criteria, which of the following sta O BBB bonds usually have the lowest yields in the bond markets. Senior mortgage bonds Subordinated debentures Debentures Junior mortgage bonds
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Understanding Bond Types and Ratings**
You can distinguish various types of bonds by their terms of contract, pledge of collateral, and other factors. Below is a table that describes different types of bonds:
| **Description** | **Type of Bond** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|
| These bonds are backed by real estate holdings and equipment. If a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets. | Subordinated debentures |
| These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. | |
| These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. | |
A diagram illustrating the hierarchy of bonds includes:
- Senior mortgage bonds
- Subordinated debentures
- Debentures
- Junior mortgage bonds
**Bond Ratings and Criteria**
Based on your understanding of bond ratings and bond-rating criteria, determine which of the following statements is true:
- ○ BBB bonds usually have the lowest yields in the bond markets.
- ○ US government bonds usually have the lowest yields in the bond markets.
**Economic Context: The 2008 Financial Crisis**
In 2008, the United States began to witness one of the worst recessions since the 1930s. The collapse of the housing bubble in 2006 led to a massive decline in real estate prices, affecting consumers and institutions, especially banking and financial entities. Severe liquidity shortfalls in the United States and other global markets led to a serious credit crisis. During the credit crisis of 2008–2009, several banks and other businesses went through a reorganization process or were forced to liquidate. Consider the following example:
In January 2009, American electronics retailer Circuit City Inc. closed all of its stores and sold all of its merchandise.
**Source:** "Circuit City to Shut Down." *CNN Money*. Cable News Network. Accessed August 31, 2010. [Link](http://money.cnn.com/2009/01/16/news/companies/circuit_city)
Transcribed Image Text:**Bond Types and Financial Crisis**
**Bond Types:**
- Bonds are traded in the bond markets, and certain bonds offer higher yields but come with more risk. Here's a brief overview of bond types:
- **Senior Mortgage Bonds**
- **Subordinated Debentures**
- **Debentures**
- **Junior Mortgage Bonds**
**Bond Yields:**
- Based on bond ratings and criteria, it is usually understood that:
- US government bonds generally have the lowest yields in bond markets as they are considered safer.
- BBB bonds typically have higher yields compared to US government bonds.
**2008 Financial Crisis Overview:**
- The recession in the United States during 2008 was the most severe since the 1930s.
- The housing bubble's collapse in 2006 led to a decline in real estate prices, impacting consumers and financial institutions.
- Severe liquidity shortages prompted a credit crisis both in the US and globally.
- Consequently, many banks and businesses were reorganized or liquidated during the 2008-2009 period.
**Case Study on Liquidation:**
An example is provided with the closure of the electronics retailer Circuit City Inc. in January 2009. The company shuttered its stores and sold all its merchandise, which is a classic example of:
- **Liquidation**
(Source: "Circuit City to Shut Down," CNN Money, August 31, 2010)
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