债券市场分析与策略第7版答案

1、CHAPTER 7CORPORATE DEBT INSTRUMENTSCHAPTER SUMMARYCorporate debt instruments are financial obligations of a corporation that have priority over its common stock and preferred stock in the case of bankruptcy. In this chapter we discuss the following corporate debt instruments: corporate bonds, medium

2、-term notes, commercial paper, and asset-backed securities. The discussion of convertible corporate bonds and asset-backed securities come in later chapters.CORPORATE BONDSCorporate bonds are classified by the type of issuer. The four general classifications used by bond information services are uti

3、lities, transportations, industrials, and banks and finance companies.Features of a Corporate Bond IssueThe essential features of a corporate bond are straightforward. The corporate issuer promises to pay a specified percentage of par value (the coupon payments) on designated dates and to repay par

4、or principal value of the bond at maturity. Failure to pay either the principal or interest when due constitutes legal default, and investors can go to court to enforce the contract.The promises of corporate bond issuers and the rights of investors who buy them are set forth in great detail in contr

5、acts called bond indentures. The indenture is made out to the corporate trustee as a representative of the interests of bondholders; that is, a trustee acts in a fiduciary capacity for investors who own the bond issue.Most corporate bonds are term bonds; that is, they run for a term of years, then b

6、ecome due and payable. Generally, obligations due in under 10 years from the date of issue are called notes. Some corporate bond issues are arranged so that specified principal amounts become due on specified dates. Such issues are called serial bonds.Security for BondsSome companies own securities

7、of other companies; they are holding companies, and the other companies are subsidiaries. To satisfy the desire of bondholders for security, they will pledge stocks, notes, bonds or whatever other kind of obligations they own. These assets are termed collateral (or personal property); bonds secured

8、by such assets are called collateral trust bonds.Debenture bonds are debt securities not secured by a specific pledge of property. Debenture bondholders have the claim of general creditors on all assets of the issuer not pledged specifically to secure other debt. Subordinated debenture bonds rank af

9、ter secured debt, after debenture bonds, and often after some general creditors in their claim on assets and earnings. For a given corporation, secured debt (such as mortgage bonds) will cost less than debenture bonds, and debenture bonds will cost less than subordinated debenture bonds.Guaranteed b

10、onds are obligations guaranteed by another entity. The safety of a guaranteed bond depends upon the guarantors financial capability as well as the financial capability of the issuer.Provisions for Paying Off BondsMost corporate issues have a call provision allowing the issuer an option to buy back a

11、ll or part of the issue prior to the stated maturity date. Issuers generally want the right to call because they recognize that at some time in the future the general level of interest rates may fall sufficiently below the issues coupon rate that redeeming the issue and replacing it with another iss

12、ue with a lower coupon rate would be attractive.Many investors are confused by the terms noncallable and nonrefundable. Call protection is much more absolute than refunding protection. Refunding means to replace an old bond issue with a new one, often at a lower interest cost.Bonds can be called in

13、whole (the entire issue) or in part (only a portion). When less than the entire issue is called, the specific bonds to be called are selected randomly or on a pro rata basis. Corporate bond indentures may require the issuer to retire a specified portion of an issue each year. This is referred to as

14、a sinking fund requirement.Accrued InterestIn addition to the agreed-upon price, the buyer must pay the seller accrued interest. Each month in a corporate bond year is 30 days, whether it is February, April, or August. A 12% coupon corporate bond pays $120 per year per $1,000 par value, accruing int

15、erest at $10 per month or $0.33333 per day.Corporate Bond RatingsProfessional money managers use various techniques to analyze information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations. This activity is known as credit an

16、alysis. Individual investors and institutional bond investors rely primarily on nationally recognized rating companies that perform credit analysis and issue their conclusions in the form of ratings. The three commercial rating companies are Moodys Investors Service, Standard & Poors Corporation, an

17、d Fitch Ratings.In all rating systems the term high grade means low credit risk, or conversely, high probability of future payment. Bonds rated triple A are said to be prime; double A are of high quality; single A issues are called upper medium grade, and triple B are medium grade. Lower rated bonds

18、 are said to have speculative elements or to be distinctly speculative.Bond issues that are assigned a rating in the top four categories are referred to as investment-grade bonds. Issues that carry a rating below the top four categories are referred to as noninvestment-grade bonds, or more popularly

19、 as high-yield bonds or junk bonds. Thus, the corporate bond market can be divided into two sectors: the investment-grade and noninvestment-grade markets.Default Rates and Default Loss RatesHistorically, a higher percentage of defaults are for non-investment-grade rated bonds. To evaluate the perfor

20、mance of the corporate bond sector, more than just default rates are needed. The reason is that default rates by themselves are not of paramount significance. It is perfectly possible for a portfolio of corporate bonds to suffer defaults and to outperform Treasuries at the same time, provided the yi

21、eld spread of the portfolio is sufficiently high to offset the losses from default. Furthermore, because holders of defaulted bonds typically recover a percentage of the face amount of their investment, this is called the recovery rate. Therefore, an important measure in studying the performance of

22、the corporate bond sector is the default loss rate, which is defined as: Default loss rate = Default rate * (100% - Recovery rate).Event RiskOccasionally, the ability of an issuer to make interest and principal payments changes seriously and unexpectedly because of (i) a natural or industrial accide

23、nt or some regulatory change, or (ii) a takeover or corporate restructuring. These risks are referred to generically as event risk.High-Yield Corporate Bond SectorHigh-yield bonds, commonly called junk bonds, are issues with quality ratings below triple B. Bond issues in this sector of the market ma

24、y have been downgraded to noninvestment-grade, or they may have been rated noninvestment-grade at the time of issuance, called original-issue high-yield bonds. Bonds that have been downgraded fall into two groups: (i) issues that have been downgraded because the issuer voluntarily significantly incr

25、eased their debt as a result of a leveraged buyout or a recapitalization, and (ii) issues that have been downgraded for other reasons.In a leveraged buyout (LBO) or a recapitalization, the heavy interest payment burden that the corporation assumes places severe cash flow constraints on the firm. To

26、reduce this burden, firms involved in LBOs and recapitalizations have issued bonds with deferred coupon structures that permit the issuer to avoid using cash to make interest payments for a period of three to seven years. There are three types of deferred coupon structures: deferred-interest bonds,

27、step-up bonds, and payment-in-kind bonds.Deferred-interest bonds sell at a deep discount and do not pay interest for an initial period, typically from three to seven years. Step-up bonds do pay coupon interest, but the coupon rate is low for an initial period and then increases (“steps up”) to a hig

28、her coupon rate. Payment-in-kind (PIK) bonds give the issuer an option to pay cash at a coupon payment date or give the bondholder a similar bond (i.e., a bond with the same coupon rate and a par value equal to the amount of the coupon payment that would have been paid). The period during which the

29、issuer can make this choice varies from 5 to 10 years.In late 1987, a junk bond came to market with a structure allowing the issuer to reset the coupon rate so that the bond will trade at a predetermined price. The coupon rate may reset annually or even more frequently, or reset only one time over t

30、he life of the bond. Generally, the coupon rate at reset time will be the average of rates suggested by two investment banking firms. The new rate will then reflect both the level of interest rates at the reset date, and the credit spread the market wants on the issue at the reset date. This structu

31、re is called an extendable reset.In a floating-rate issue, the coupon rate resets according to a fixed spread over some benchmark, with the spread specified in the indenture. The amount of the spread reflects market conditions at the time the issue is offered. The coupon rate on an extendable reset

32、bond by contrast is reset based on market conditions (as suggested by several investment banking firms) at the time of the reset date. Moreover, the new coupon rate reflects the new level of interest rates and the new spread that investors seek.The advantage to issuers of extendable reset bonds is a

33、gain that they can be assured of a long-term source of funds based on short-term rates. For investors, the advantage of these bonds is that the coupon rate will reset to the market rateboth the level of interest rates and the credit spread, in principle keeping the issue at par.Performance of High-Y

34、ield BondsThere have been several studies of the risk and return in the high-yield bond market. In the long run, high-yield corporate bonds have outperformed both investment grade corporate bonds and Treasuries but have been outperformed by common stock.Recovery RatingsWhile credit ratings provide g

35、uidance for the likelihood of default and recovery given default, the market needed better recovery information for specific bond issues. In response to this need, two ratings agencies, Fitch and Standard & Poors, developed recovery rating systems for corporate bonds.The factors considered in assign

36、ing a recovery rating to an issue by Fitch are (1) the collateral, (2) the seniority relative to other obligations in the capital structure, and (3) the expected value of the issuer in distress. The recovery rating system does not attempt to precisely predict a given level of recovery.Secondary Mark

37、etAs with all bonds, the principal second market for corporate bonds is the over-the-counter market. The major concern is market transparency.Efforts to increase price transparency in the U.S. corporate debt market resulted in the introduction in July 2002 by the National Association of Securities D

38、ealers (NASD) in a mandatory reporting of over-the-counter secondary market transactions for corporate bonds that met specific criteria. The reporting system, the Trade Reporting and Compliance Engine (also known as “TRACE”), requires that all broker/dealers who are NASD member firms report transact

39、ions in corporate bonds to TRACE.Traditionally, corporate bond trading has been an OTC market conducted via telephone and based on broker-dealer trading desks, which take principal positions in corporate bonds in order to fulfill buy and sell orders of their customers. There has been a transition aw

40、ay from this traditional form of bond trading and toward electronic trading. Electronic bond trading makes up about 30% of corporate bond trading.Auction systems allow market participants to conduct electronic auctions of securities offerings for both new issues in the primary markets and secondary

41、market offerings.Private-Placement Market for Corporate BondsSecurities privately placed are exempt from the registration with the SEC because they are issued in transactions that do not involve a public offering. Unlike publicly issued bonds, the issuers of privately placed issues tend to be less w

42、ell known.MEDIUM-TERM NOTESA medium-term note (MTN) is a corporate debt instrument, with the unique characteristic that notes are offered continuously to investors by an agent of the issuer. Investors can select from several maturity ranges: 9 months to 1 year, more than 1 year to 18 months, more th

43、an 18 months to 2 years, and so on up to 30 years. Medium-term notes are registered with the SEC under Rule 415 (the shelf registration rule), which gives a corporation the maximum flexibility for issuing securities on a continuous basis. Borrowers have flexibility in designing MTNs to satisfy their

44、 own needs. They can issue fixed- or floating-rate debt. The coupon payments can be denominated in U.S. dollars or in a foreign currency.Primary MarketMedium-term notes differ from corporate bonds in the manner in which they are distributed to investors when they are initially sold. Although some in

45、vestment-grade corporate bond issues are sold on a best-efforts basis, typically they are underwritten by investment bankers. Traditionally, MTNs have been distributed on a best-efforts basis by either an investment banking firm or other broker/dealers acting as agents. Another difference between co

46、rporate bond and MTNs when they are offered is that MTNs are usually sold in relatively small amounts on a continuous or an intermittent basis, whereas corporate bonds are sold in large, discrete offerings.Structured MTNsAt one time the typical MTN was a fixed-rate debenture that was noncallable. It

47、 is common today for issuers of MTNs to couple their offerings with transactions in the derivative markets (options, futures/forwards, swaps, caps, and floors) so as to create debt obligations with more interesting risk-return features than are available in the corporate bond market. MTNs created wh

48、en the issuer simultaneously transacts in the derivative markets are called structured notes. The most common derivative instrument used in creating structured notes is a swap.COMMERCIAL PAPERCommercial paper is a short-term unsecured promissory note that is issued in the open market and that repres

49、ents the obligation of the issuing corporation. The primary purpose of commercial paper was to provide short-term funds for seasonal and working capital needs. Corporations now use commercial paper for other purposes such as bridge financing.Characteristics of Commercial PaperIn the United States, c

50、ommercial paper ranges in maturity from 1 day to 270 days. Special provisions in the 1933 act exempt commercial paper from registration as long as the maturity does not exceed 270 days. Hence, to avoid the costs associated with registering issues with the SEC, firms rarely issue commercial paper wit

51、h maturities exceeding 270 days. To pay off holders of maturing paper, issuers generally use the proceeds obtained by selling new commercial paper. This process is often described as rolling over short-term paper.Issuers of Commercial PaperThere are more than 1,700 issuers of commercial papers in th

52、e United States. Corporate issuers of commercial paper can be divided into financial companies and nonfinancial companies. There has been significantly greater use of commercial paper by financial companies.Although the issuers of commercial paper typically have high credit ratings, smaller and less

53、 well-known companies with lower credit ratings have been able to issue paper. They have been able to do so by means of credit support from a firm with a high credit rating (such paper is called credit-supported commercial paper) or by collateralizing the issue with high-quality assets (such paper i

54、s called asset-backed commercial paper).Default Risk and Credit RatingsWith one exception, between 1971 and mid-1989 there were no defaults on commercial paper. The three companies that rate corporate bonds and medium-term notes also rate commercial paper. As with the ratings on other securities, co

55、mmercial paper ratings are categorized as either investment grade or non-investment grade.Directly Placed Versus Dealer-Placed PaperCommercial paper is classified as either direct paper or dealer-placed paper. Directly placed paper is sold by the issuing firm directly to investors without the help o

56、f an agent or an intermediary. Dealer-placed commercial paper requires the services of an agent to sell an issuers paper. The agent distributes the paper on a best efforts underwriting basis by commercial banks and securities houses.Tier 1 and Tier 2 PapersA major investor in commercial paper is mon

57、ey market mutual funds. However, there are restrictions imposed on money market mutual funds by the SEC. To be eligible paper, the issue must carry one of the two highest ratings (“1” or “2”) from at least two of the nationally recognized statistical ratings agencies.Tier-1 paper is defined as eligi

58、ble paper that is rated “1” by at least two of the rating agencies; tier-2 paper security is defined as eligible paper that is not a tier-1 security.Secondary MarketDespite the fact that the commercial paper market is larger than markets for other money market instruments, secondary trading activity

59、 is much smaller.Yields on Commercial PaperLike Treasury bills, commercial paper is a discount instrument. That is, it is sold at a price that is less than its maturity value. The commercial paper rate is higher than that on Treasury bills for the same maturity. There are three reasons for this. First, the investor in c