Chapter 10, Problem 1PS

Summary Introduction

Requirement 1

To determine:

The definition of a catastrophe bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Catastrophe bonds are bonds which are meant for raising money in case of any hurricane, earthquake or any such catastrophe. These bonds are risk linked securities. Here the risk is transferred from the bond issuer or sponsor to the investor. Since the risk is high, these bonds provide higher coupon rates. Bondholders may lose everything or a part of the investments in case of any calamity.

Catastrophe bonds are high yield, high risk bonds.

Conclusion

Catastrophe bonds are high yield, high risk bonds.

Summary Introduction

To determine:

The definition of Eurobond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Eurobonds are those bonds which are denominated by currencies which are different from the currency or the market in which they was issued. They are issued in one country's currency and sold to markets of other nations. These bonds have smaller par values. These bonds are generally grouped based on the currency. Example: Euroyen bond or Eurodollar bonds. These bonds attract the investors owing to their high liquidity.

Eurobonds are small par value, high liquidity bonds

Conclusion

Eurobonds are denominated in different currencies.

Summary Introduction

Requirement 3

To Define:

The definition of a zero-coupon bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

A type of bond which does not pay any coupons is the zero-coupon bond. These bonds are issued at a value which is discounted and they are redeemed at full face value of the bond. This becomes the profit earned from the bond.

Zero-coupon bonds are those that pay no coupons.

Conclusion

Zero coupon bonds are no coupon paying bonds.

Summary Introduction

Requirement 4

To determine:

The definition of a Samurai bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

The bonds issued by the non-Japanese companies subjected to the regulations of Japan are Samurai bonds. These bonds are yen-denominated bonds. There are also other similar bonds like Euroyens which are issued generally in London and countries other than Japan.

Samurai bonds are sold in Japan.

Conclusion

Bonds sold in Japan.

Summary Introduction

Requirement 5

To determine:

The definition of a Junk bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

As per the credit rating by S&P or Ba, some bonds get a credit rating of BB or lower. Some bonds may get a credit rating which is lower than BB. These bonds are called Junk bonds. They may also be unrated bonds. They carry a higher default risk. These bonds are high yield bonds.

Junk bonds are low rated bonds.

Conclusion

Junk bonds are high yield bonds.

Summary Introduction

Requirement 6

To determine:

The definition of a convertible bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Convertible bonds are bonds which could be exchanged to specific number of shares or stocks at the discretion of the bondholder. The coupon rates of these bonds are lower. This is because lower coupon rate is the price that the bondholders are paying for getting the converting option on the security.

Convertible bonds are exchangeable.

Conclusion

Convertible bonds are low coupon rate bonds.

Summary Introduction

Requirement 7

To determine:

The definition of a serial bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Serial bonds are issues which are structured in such a way that they mature at regular intervals. The burden of the firm to repay the principal amount is spread now. These bonds are used to finance projects which could provide regular income with which bond repayment could take place.

Serial bonds are structured issues.

Conclusion

Serial bonds are structured issues.

Summary Introduction

Requirement 8

To determine:

The definition of an Equipment obligation bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Equipment obligation bonds are those bonds which are issued where the collateral against the bonds is the equipments which are pledged.

Equipment obligation bonds are with equipment collaterals

Conclusion

Equipments are pledged as collaterals here.

Summary Introduction

Requirement 9

To determine:

The definition of an original issue discount bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

Original issue discount bonds are the kind of bonds where the coupon rates are lower intentionally and which make the bond to be sold at a value discounted from the par value. These bonds are not as popular as the other coupon bonds which are issued at par.

Original issue discount bonds are intentionally issued at low coupon rates.

Conclusion

Original issue discount bonds are intentionally issued at low coupon values.

Summary Introduction

Requirement 10

To determine:

The definition of an Indexed bond

Introduction:

Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution

The types of bonds where the payments are generally made based on the price of a certain commodity or based on the general price index are called the Indexed bonds.

Indexed bonds are those whose payments are dependent on general price index.

Conclusion

Indexed bonds are linked to the general price index.