CFP Chapter08

8/9/2019 CFP Chapter08

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Debt Instruments:

Qualitative AspectsChapter 8

Sources of Risk

Non Marketable vs. MarketableShort!erm" #on$!erm Instruments

Mort$a$e %acke& Securities

%ankruptc'


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Sources of Risk

(Default) probabilit' of not $ettin$ all ofthe promise& interest an& principal.

(Price) chan$es in prices as interest

rates chan$e over time.(Purchasing Power) e*ects on in+ation

on bu'in$ po,er of coupon income.

(Liquidity: inabilit' to bu' or sell atintrinsic value &ue to inactive marketor small +oat.


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NonMarketable Debt

( Certi-cates of Deposit Depos. Inst./0 1 months to 2 'ears ma' carr' special terms/0 Decision Criterion: 34pectations for rates0 Ma' be Brokered

( Mone' Market 5un& %alances0 Investe& in S! instruments0 Man' have check ,ritin$ privile&$es

( Savin$s %on&s 6.S. !reasur'/0 33 S.%. 7erocoupon bon&9/0 I%on&s rates reset 24 a 'ear/0 #o, &enominations available


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Marketable Debt

( e' Attribute: #IQ6IDI!;

0 Abilit' to convert securities to cash at aprice similarto price of previous tra&e in

securit'0 Assumes no si$ni-cant ne, information

has arrive& since previous tra&e

0 Also abilit' to sell an asset


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Marketable Debt

(!reasur' %ills0 >1 an& 2?,eek maturities sol& ,eekl'

0 @2,eek bills once a month

0 %u' from treasur'" online" or from bank

0 Sol& at a &iscount( competitive an& non competitive bi&s

0 Dealer&ominate& secon&ar' market0 %D; = 5ace 0 Brice/5ace E 1?FD!M/

0 %3; = 5ace 0 Brice/Brice E 1?@D!M/


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Marketable Debt

( Commercial Baper0 2GF &a' ma4 maturit'

0 Sol& at &iscount

0 H>"FFF"FFF is t'pical 5ace alue0 5inancial companies are bi$$est issuers

0 Mone' market fun&s most si$ni-cantbu'ers

( Ne$otiable CD0 Ma' be bearer or re$istere&

0 Bartiall' insure& b' %I5


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Marketable Debt

( %ankersJ Acceptances0 5inance imports

0 Si$ni-cant &ocumentation

0!ra&e& in secon&ar' markets( 3uro&ollar Deposits

0 6SD&enominate& liabilities of forei$n banks

0 Rates pai& t'picall' K 6S rates

0 Narro, sprea&s: rate pai& vs loan rate

0 Repatriation risks" lo,er re$ulator' oversi$ht


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!erm Structurehttp:online.,sL.comm&cpublicpa$e21F2Fmone'rate.html

( Discount Rate

0 Char$e& b' 5e&eral Reserve %ank on loans tobanks

( 5e&eral 5un&s Rate

0 Char$e& b' banks to each other for len&in$ e4cessreserves 7Fed Funds9/

( #I%R

0 Char$e& b' #on&on banks on loans to each other

( Brime Rate

0 In&e4e&

0 6se& b' banks to price loans


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ther MM Arran$ements

( Repurchase A$reements Repos/ an&Reverse Repos0 Repo e*ectivel' a short term loan

0 Reverse Repo 0 bu' for resale contract

( Shortterm Municipals

( Mone' Market Mutual 5un&s( Short!erm 6nit Investment !rusts


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6S Oovernment DebtSecurities

( Notes0 Ma4 maturities = >F 'ears

( %on&s0 Ma4 maturities = 1F 'ears

( Oeneral 5eatures

0 er' li


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6S Oovernment DebtSecurities

( S!RIBS0 Separate !ra&in$ of Re$istere& Interest P

Brincipal Securities

0 Sell semiannual coupons as one securit' an&sell maturit' value as separate securit'.

0 Brices set b' ;!M

(!IBS

0!reasur' In+ationBrotecte& Securities

0 #o,er coupon rates H coupon -4e&

0 Bar values a&Luste& 0 var' 'iel&s


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O BalanceSheetDebt

( OS3 Issuers lar$est/0 5NMA fannie mae/

0 5#MC fre&&ie mac/

( 5e&eral A$encies Ouarantee& b' 6S/0 3IM %ank

0 ONMA

0!A


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Municipal Debt

( Issue& b' State" Count'" or Cit' OovJt0 Oeneral bli$ation %on&s

0 Revenue %on&s

0!a4 preferences interest e4empt from5e& ta4es/


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Corporate Debt

( In&enture A$reement0 A$reement bet,een len&er an& borro,er

(Speci-es an& Restrictive ovenants

(Ma' re


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Corporate Debt

( Market !ra&in$0 !C &ominates

0 Quotes inclu&e:( Coupon rate

( Maturit'

( Current ;iel&

( olume( #ast price chan$e/


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Corporate Debt

( Collateralie& Debt0 Mort$a$e %on&s

0 3


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Corporate Debt Issues

( ther Important 5eatures0 Callable bon&s

( Call price inclu&es premium

(;iel&to5irstCall 0 impact of call premium

0 Convertible bon&s( Convertible to common stock

( Cbon& is ma' be characterie& as an interestpa'in$ calloption on the un&erl'in$ stock

( Conversions ma' be force&0"rading Flat: price &oes not inclu&e accrue&

interest

0 Tero Coupon %on&s #ure discountbon&s/


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Corporate Debt Issues

( ther Important 5eatures continue&/

0 ri$inalissue &iscount bon&s( 7Tero9 U coupon rate belo, market

0 Split coupon bon&s: from Tero to 7regular90 5loatin$ rate securities notes" bon&s/

0 Stepup notes: sche&ule& chan$es in ratepai&

0 Sinkin$ 5un&s: In&enture re


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Cre&it Ratin$s

( Several Companies specialie in ratin$ &ebtissues

( Ratin$s SPB schema/0 Brime or i$h Qualit' AAA/

0 Investment Ora&e meets le$al list re


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Corporate %ankruptc'

( De-nitions of 5ailure0 3conomic 5ailure) revenues &o not cover e4penses

0 %usiness 5ailure) termination resultin$ in loss tocre&itors

0!echnical Insolvenc': -rm cannot meet maturin$obli$ations

0 !echnical %ankruptc': alue of assets V value ofliabilities"

( #e$al %ankruptc': Acts of %ankruptc'

0 5irm a&mits inabilit' to pa' voluntar'/.0 Composition of cre&itors petitions court involuntar'/.

0 Concealment or improper transfer of assets to avoi&attachment or repossession.


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( utofCourt Reme&ies0 34tension) postpone &ue &ate.

0 Composition) cre&itors a$ree to take less.

0 Necessar' con&itions)( Debtor is $oo& moral risk.

( Debtor must sho, abilit' to make a recover'.

( Oeneral business con&itions must be favorable.

0 Cre&itor committees) len&ers assumemana$ement.

0 Assi$nment) Re


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( Rule of Absolute Briorit') Chapter @"Section @FG >WG8 la,/0 Secure& cre&itors

0!rustee e4penses0 %ack ,a$es for emplo'ees ma4 H2FFF/

0 Customer &eposits unsecure& 0 ma4 HWFF/

0 5e&eral an& State ta4es

0 6nfun&e& Bension #iabilities

0 Oeneral unsecure&/ cre&itors

0 Stockhol&ers preferre&" common/


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( Chapter G) #i


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( Chapter >>) Reor$aniation

0 Reor$aniation of repa'ment sche&ules)len$then maturities

0 Some &ebt ma' be permanentl' &ismisse&.0 Debt fre


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AssetMort$a$e %acke&Securities

( Securitiation0!urnin$ nonmarketable securities into

marketable(

34ample: mort$a$es" cre&it car& balances"accounts receivable

0 Brovi&es claims on assets not other,iseavailable to or&inar' investors

(Mort$a$ebacke& Securities M%S/0 Cash +o,s to investors = principal P

interest

0 A an& 5A are insure&


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Mort$a$e %acke& Securities

( Bass!hrou$hs0 BPI less fee sent to investor

0 Man' issuers: 5annie" 5re&&ie" Oinnie

( Collateralie& Mort$a$e bli$ations0 Cash +o,s are se


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ther Debt Securities

( 5orei$n %on&s0 Stateissue&

0 Corporate issues

0 5ore4 an& Bolitical risk important factors

( Insurance Investments0 Ouarantee& Investment Contracts

0 Annuities( Sin$lepremium &eferre&

( 5le4iblepremium &eferre&


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Guaranteed Investment

Contracts

( Stable value contract

( Available in XF>k/ retirement plans" pro-tsharin$ plans" IRAs" an& mutual fun&s

( Investment choice provi&e& b' plansponsor" but contract bet,een insurancecompan' an& emplo'ee

( Speci-e& maturit' &ate an& rate of return

$uarantee& throu$h maturit' b' insurancecompan'

( Not insure&


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Annuities

($uali!edAnnuit' is purchase& throu$ha ta4 sheltere& pro$ram

(%on&quali!edannuit' is purchase&

outsi&e a ta4sheltere& pro$ram( Accumulation value is the annuit' value

before an' surren&er char$es havebeen &e&ucte&

( Surren&er value is the account valueafter surren&er char$es have been&e&ucte&


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!'pes of Annuities

( Sin$le premium &eferre& annuitiesSBDAs/

( 5le4ible premium &eferre& annuities5BDAs/

( CDt'pe annuities

( Sin$le premium imme&iate annuitiesSBIAs/


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Annuit' Ba'out ptions

( Strai$ht life annuit'

( #ife income ,ith perio& certainannuit'

( #ife ,ith cash or installment refun&annuit'

(Yoint an& survivor life annuit'( 5i4e& perio& annuit'

( 5i4e& amount annuit'

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CFP Chapter08

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