CHAPTER THIRTEEN

FIXED-INCOME ANALYSIS

SAVINGS DEPOSITS

COMMERCIAL BANKS•their financial products include

various fixed-income securities, such asdemand depositstime depositscertificates of deposit

SAVINGS DEPOSITS

COMMERCIAL BANKS•their financial products include

various fixed-income securities, and areusually insured by a federal agency,

such as the Federal Deposit Insurance Corporation, know 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 basismaturities up to 52 weekssold by auction (bid process)

U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT SECURITIES

•U.S. Treasury Noteslonger term than T-billsfrom one to ten yearssemiannual coupon paymentscurrent owners are registeredissued in denominations of $1000 or moreactive secondary market

U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT

SECURITIES•U.S. Treasury Bonds

maturities greater than ten yearsdenominations 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 bondsSeries HH mature in 20 years with

semiannual coupon payments

U.S. GOVERNMENT SECURITIES TYPES OF GOVERNMENT SECURITIES

•Zero Coupon Treasury Security Receipts or Coupon strippingTreasury bonds are purchased and placed

in trust with a custodiansets of receipts issued for each coupon

dateanother set of receipts issued for certain

maturity dats

FEDERAL AGENCY SECURITIES BONDS OF FEDERAL AGENCIES

•Department of Defense

•Export-Import Bank

•Federal Housing Authority

•Postal Service

•Tennessee Valley Authority

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

STATE AND LOCAL GOVERNMENT SECURITIES ISSUING AGENCIES

•States

•Special Districts

•Municipalities, Counties and Townships

STATE AND LOCAL GOVERNMENT SECURITIES TYPES OF MUNICIPAL BONDS

•General Obligation

•Revenue

•Industrial Development

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

CORPORATE BONDS

THE INDENTURE•DEFININTION: a legal document

formally describing the terms of the legal relationship between a bond issuer and bondholders.

CORPORATE BONDS

THE INDENTURE•The Trustee

acts to protect the intersts of bondholders

facilitates communications between them and the issuer

the indenture promises the trustee that it will comply with a number of stated provisions

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

CORPORATE BONDS

TYPES OF BONDS•mortgage

•collateral trust

•equipment obligations

•debentures

•income

•guaranteed

CORPORATE BONDS

CALL PROVISIONS•the option to pay off the bond at par

at any time prior to maturity

CORPORATE BONDS

THE INDENTURE•Two Kinds of Call Provisions:

no calls in first five years orcall premium is specified in the provision

at time of issue

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

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 issued

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

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

END OF CHAPTER 13