Bonds

-is an instrument of indebtedness of the bond issuer to the holders. The

most common types of bonds include Municipal bonds and Corporate bonds.
Municipal bonds/Muni bond
-is a bond issued by a local government or territory or one of their
agencies. It is generally used to finance public projects such as, Roads,
Schools, Airports, and Seaport, and infrastructure-related repairs.
Corporate Bond
-is a bond issued by corporation in order to raise financing for a variety
of reasons such as to ongoing operations, M&A? or to expand business.
Bond is a debt security, under which the issuer owes the holders a debt and is
obliged to pay them interest or to pay the principal at a later date, termed the
maturity date.
*LENDER (creditor)-the holder of the bond.
*BORROWER (debtor)-the issuer of the bond.
*BONDS are issued by public authorities, credit institutions companies and
supranational institutions in the primary markets. The most common process
for issuing bonds is through underwriting.
*Underwriting arrangement might create in a number of situations including
insurance, issue of securities in a public offering, and bank lending among
others.
*PRINCIPAL, PAR, OR FACE AMOUNT
-is the amount on which the issuer pays interest, and which most
commonly has to repaid at the end of the term. The issuer has to repay
the nominal amount on the maturity date.
*Maturity date- refers to the final payment date of a loan or other financial
instrument at which point the principal is due to paid.
*Short Term (bills): Maturities between 1 and 5 years.
*Medium Term (Notes): Maturities between 6 and 12 years.
*long Term (Bonds): Maturities longer than 12 years.
*Coupon- is the interest rate that the issuer pays to the holder. -Normally
described in terms of the coupon rate.
*Yield- the rate of return receive from investing in the bond.
*Current Yield/Running yield-which simply the annual interest payment
divided by the current market price of the bond. (Clean price)
*Yield Maturity/Redemption yield-more useful measure of the return of the
bond.
INDENTURES AND COVENANTS
*Indenture- is a formal debt agreement that establish the term of a bond
issue.
*Covenants- are the clauses of such on agreements
-specify the rights of bondholder and the duties of issuer, such as actions
that the issuer is obligated to perform.
Types of Bonds
A. According to Types of Security

1. Secured Bonds/Mortgage Bonds

- are backed by the firm-owned property
- Mortgage bonds are a lien on specifically named property such as
land, building, equipment and other fixed assets specifically
pledged as security.
Specific types are:
 Real Estate which includes land and property attached to the
land;
Example: Buildings, Roads, Machinery and Canals
 Chattel which consist of personal and movable property
Example: Furniture, Clothes hanging in the closet and
Fixtures
Other Sub-Classes of Real Estate Mortgages
 Senior Liens- which have prior claims to fixed assets
pledged as security, or sometimes called First mortgage
Bonds.
  Junior Liens- have subsequent claims to fixed assets
pledged as security, or Subordinate claims to the senior
liens. Also called Second Mortgage or Third Mortgage
Bonds.
Real Estate Mortgages According to Types of Issue
1. Closed~ end Issue- where subsequent issues on the specific
property pledged as collateral are not allowed.
2. Open~ end Issue- permits issuance of additional bonds or a
series of issues under the original mortgages secured by a
single lien.
3. Limited open~ end Issue- allows additional bonds to be sold
after the original issue, but stipulates a maximum amount.
An issue becomes closed when a specified amount of bonds
have been issue.

2. Debentures

-are unsecured long-term bonds of a corporation. This bond is more

risky than secured bonds.
~Subordinate Debentures – are those with lower payment in the hierarchy.
3. Convertible Bonds
-it helps the subordinate to lower the interest of debentures
-convert the debt to equity at stated period of time.
~ Conversion Rate is set above the price of common stock of the
issuing date.
4. Assumed Bonds
-are those absorbed by the surviving corporation.
-they remained unchanged with the same protection on mortgage
lien given to the bonds.
5. Guaranteed Bonds
-is a type of bonds where the payment of interest or principals, or
both, guaranteed by one or more individuals or corporation.
6. Joint Bonds
-are owned by several companies
-the same property used as security for a bonds issue
-binding themselves jointly as debtors in this issue

B. According to Participation in Earnings

Municipal Bonds/Government Bonds

-are issued by a country, cities, municipalities or any authorized public
authority such as school boards, highway commissions, post districts.
- Municipal bonds are able to offer a lower rate of interest than
corporate bonds, because the interest income is exempt from income
taxes.
Types:
1. General Obligation Bonds
-are backed by the full faith and credit of the issuer.
2. Revenue Bonds
-derived from the income produced by the funded assets.
3. Pure Discount Bonds
-promises to pay certain amount at a specified time in future.
~the difference between the par value and selling price is the bond discount.
4. Corporate Bonds
- are coupon bonds, where interest payments are made regularly, as
scheduled, between the original issue date and maturity date.
5. Registered Bonds
-identify the names of the owner in the transfer books of the company.
6. Income Bonds
-have a fixed rates of interest payable only if earned and declared by
board of directors.
7. Participating Bonds
-stipulates a fixed coupon rate but also provide a method of
receiving additional income over and above the minimum sum.
8. Bonds with Warrant
-have the options or right to purchase stock at a stated price
during a stipulated period of time.
Detachable Warrant- are sold or exercised apart from the bonds
Non-detachable Warrant- cannot be sold or exercised separately from the
bonds.

C. According to Method of Retirement

1. Serial bonds mature semi-annually, and are paid on staggered basis

2. Sinking fund bonds
-requires the issuer to deposit annually a specific sum of money with the
trustee of the issue for the retirement of the part of the issue. This occur
before maturity of the bond and has periodic repayments of the
obligation
3. Callable bonds provide that the issue be cancelled or called .
4. Perpetual bonds
- are those where the holder cannot redeem payment. This is commonly
used in public finance, where the government as the debtor, has
permanent existence.
All bonds can be classified as premium, par or discount bonds. If bond is
selling at a premium , the price must fall If bond is selling at a discount, the
price must rise.
The effect of a given change in interest rates on the price of the bond depends
upon this variable:
 The maturity of the bond
 The COUPON RATE
  The level of interest rates at the time of the change interest rates.
- Interest rate risk is the threat that a bond’s price will change due to a change
in interest rates.
 Forward rates of interest
-are rates for future time periods that are implied by currently
available spot rates. A forward rate is a contracted price for a
transaction that will be completed at an agreed upon date in the future.
 Spot rates
-is a yield prevailing at a given moment in time. A spot rate is a
contracted price for a transaction that will completed immediately.
 A risk premium
-is the return in excess of the risk-free rate of return an investment that
expected to yield.
 Default risk
-is the chance that one or more promised payment on a security will
missed. Default risk is the chance that a company or individual will be
unable to make the required payments on their debt obligation. Lenders
and investors are expose to default risk in virtually all forms of credit
extensions. A higher level of risk leads to a higher required return, and
in turn, a higher interest rate.

Bonds: As Differentiated from stocks

 Bond is an instrument of debt; while stock is an instrument of
ownership in a business;
 Bondholders -are priority in payment of obligation, over the
stockholders;
 Bonds have a maturity date to pay principal and interest, while stock,
as capital financing do not have maturity dates
Indenture
This is a contract between the corporation and the trustee on behalf of
the bondholders. The indenture contains the terms of the bond issue
covering the obligations of the corporation, the manner of its fulfilment,
the rights and responsibilities of bondholders, and the duties of the
trustee. It contents are:
 The amount, length of time and denomination of the bond issue;
 Serial issue and the size of each issue;
 The rate of interest, terms of payment and the designated place of
collection;
 Rights, privileges or limitations attached to the issue;
 Security types and it’s terms;
 Manner of redemption;
 Remedies available to bondholders, in case of bond issuer’s default;
 Duties and remunerations of the trustee .

Trustee
This is the person or entity who handles monies or property on behalf of
another in the trust. It duties include:
 Representing bondholders in case of default ;
 Making payment of principal and interest;
 Managing sinking fund;
 Reporting, annually ,to bondholders results of operations ,condition
of the bond issue and pledged security;
 Providing bondholder list of other bondholders ,when needed, to
form special committees to protect their interest;
 Notifying bondholders of any default ;
 Informing bondholders of any loans by the trustee to the corporation.
LEASING
- this means of obtaining economic use of an asset for a specific period of time
without obtaining ownership of the said asset. In the lease contract, the
property owner (lessor) agrees to permit the use of his property to a lessee for
a period of time. In return, the lessee agrees to make a series of periodic
payments to the lessor.

TYPES OF LEASING ARE:

•OPERATING LEASING
-short term
-Several lessees for the same object

•FINANCIAL LEASING
-medium or long term
- One or few lessees for same object

INVESTMENT BANKING

-is a special segment of banking operation that helps individuals and

organizations raise capital and provide financial consultancy services of them.
They act as intermediaries between security issuers and investigators and help
new firms to go public.

FINANCIAL MARKET

- is may be a physical location or a virtual one over a network (for

example the Internet) where buyers and sellers meet to exchange good
and services at prices determined by the forces of supply and demand.
Marketplace where buyers and sellers participate in the trade of assets
such as equities, bonds e.g
Stock exchange or commodity exchange.
Types of Financial Market:

1. Capital Market
• Stock Market- allow investors to buy and sell shares in publicity
traded companies.
• Bond Market- a security in which an investor loans money for defined
period of time at a pre-established rate of interest.
2. Commodity Market
-a physical or virtual marketplace for buying, selling and trading raw or
primary products.

3. Money Market
-is a portion of the financial market that trade highly liquid and short-
term maturities.

4. Foreign Exchange Market- which facilitate the trading of foreign exchange .

COMMON MONEY MARKET INSTRUMENTS

The money market is a component of financial markets for assets involved in

short-term borrowing and lending with original securities of one year or short
time frames.

Trading in the Money Market Involves:

1. Treasury Bills - are the short-term obligation of a national
government that ate issued to mature in three to
twelve months.

2. Commercial Papers -are unsecured promissory notes with a fixed

maturity of 1 to 270 days, usually sold at a discount
from the face value.
3. Municipal Notes - are short-term notes issued by municipalities an
anticipation of tax receipts or other revenues.

4. Bank Reserves - are interest-bearing deposits held by banks and other

depository institutions.

☆ Intermediate-term sources of capital ☆

~ consists of funds borrowed with repayment schedule of more than one
year but less than ten years. Significantly, it provides a useful
alternative when the firm is unable to continue expanding assets with
internal or short-term sources.
■ Term Loans by Private Commercial Banks
- are extended for a specific period, normally one to ten years, repaid
with interest, usually by regular periodic payments.
• Straight Term Loan ~ is grant to finance fixed assets or to fund permanent
working capital needs.
• Revolving Credit ~ is a legally assured line of credit, normally extended for
two or three year time periods.
■ Term Loans by Insurance Companies
- It maintain funds from policy holders. These funds may invested in
term loans.
■ Term Loans by Finance Companies
-fund loaned by finance companies may use for any of the following
purposes.

• Additional working capital

• Purchase of fixed assets-machinery and equipment
• Construction of additional plant facilities
• Retirement of maturing securities
• Buying out partners or stockholders
• Expansion to new businesses

■ Term Loans by the Government

- the financing assistance provided by the government comes from the
following funding schemes.
• The industrial loan and guarantee fund is a government sponsored
financing program jointly created by the Philippine Government and
United States Government to encourage the establishment and
expansion of small and medium industries that will contribute to the
economic development of the country.
• The agriculture loan fund is also a government sponsored financing
assistance made available for the working capital and fixed asset
acquisition requirements of agricultural and agribusiness projects.
• The Balikatan sa Kabuhayan Program Grants Loan from the
Livelihood Assistance for Urban Development and Export Development
Assistance Program.
• The Apex Financing Scheme is a consortium of foreign private banks
with the Banko Sentral and other accredited financial institutions.
• Other lending programs from the Philippine National Bank, the Land
Bank of the Philippines, the Development Bank of the Philippines, the
Social Security System and the Government Service Insurance System.

SHORT TERM SOURCE OF CAPITAL

■SHORT-TERM FINANCTING
Deals with the demand for and supply of short-term funds which may
Either be secured or unsecured.
■ADVANTAGE OF SHORT-TERM CREDITS
1. They are easier to obtain
2. Short-term financing is often less costly
3. Short-term financing offers flexibility to the borrower

■DISADVANTAGE OF SHORT-TERM CREDITS

1. Short-term credits mature more frequently
2. Short-term debts may, at times, be more costly than Long-term debts.

■THE SUPPLIER OF SHORT-TERM FUNDS

●COMMERCIAL CREDITORS
●COMMERCIAL BANKS
● COMMERCIALPAPER HOUSE
● FINANCE COMPANIES
●FACTORING
●INSURANCE COMPANIES

COMMERCIAL CREDITORS
Supplier extending credit to a buyer for use in manufacturing,
processing or reselling goods for profits are called TRADE CREDITORS.
Credit extended by trade creditors in short-term, is usually unsecured, and
also known as TRADE CREDIT. Trade credit is also sometimes referred to as
commercial credit, mercantile credit, and account receivable credit.
■TRADE CREDIT INSTRUMENTS
1. OPEN-BOOK CREDIT
- is an unsecured loan that permits the client to pay for goods delivered
within a specified number of days.
2. TRADE-ACCEPTANCE
- Is a time draft drawn by a seller upon a purchase with the seller as
payee , and accepted by the purchaser as evidence that the goods
shipped are satisfactory and that the price is due and payable
3. PROMISSORY NOTE
- is an unconditional promise in writing made by one person to another.
》COST OF TRADE CREDIT
An annual cost of Discount 360days
Not =---------- ×------- Taking discount 1-Discount number of Days credit-
Discount Period
●COMMERCIAL BANKS
Are institutions which individuals or firm may top as source of Short-
term financing.
●COMMERCIAL PAPER HOUSE
A commercial paper is a short-term promissory note generally
unsecured which sold through commercial paper dealers directly to
investors
●FINANCE COMPANIES
Are those who are engaged in making short and intermediate term
installment loans to consumers, factors of finance business receivable,
and finance the sale of business and farm equipment.
●FACTORS/FACTORING
Factors perform the financial service know as factoring, which consist
of the purchase of accounts receivable outright without recourse to the
seller of credit Losses.
●INSURANCECOMPANIES
Provide a stable source of term account.
 BASIC FINANCE
CHAPTER 6
OTHER SOURCES OF CAPITAL

LONG-TERM SOURCES OF
CAPITAL:SS
BONDS

REPORTERS:
MA THERESA ROSAL VENTINILLA (BONDS)

JOSEPHINE AGBUYA (TYPES OF BONDS)

SAMBOY FRIAS (TYPES OF BONDS ACCORDING TO RETIREMENT- TRUSTEES)

JOHN LLYOD POQUIZ (LEASING)

ELAINE MASIGLAT (INTERMEDIATE-TERM SOURCES OF CAPITAL)

DOMINIC FERRER (SHORT-TERM SOURCES OF CAPITAL)