Bonds

 Long-term financial instruments that issued by the government or private companies at a

certain interest coupon to pay its long-term obligation.
 Phil.: Minimum: 5 years, Maximum: 30 years.
 US: Minimum: 10 years, Maximum: 30 years.
 US: They use the term “Treasury Notes” instead of “Treasury Bonds”

General Classification

1. Bearer – Transferrable
2. Registered – Non-transferrable

Types of Bonds

1. Treasury Bonds
2. Federal Bonds
3. Municipal Bonds
4. Corporate Bonds

How bonds are issued? Through:

1. Primary Market (IPO)

2. Secondary Market

Two ways to derive yield from bonds

1. Interest
2. Difference in purchase price and par value
Types of bonds, discussed:

 Treasury Bonds
Sold through:
1. Direct/Private Placement
2. Auctions

Types:

a. Stripped Treasury Bonds

- “Strips”, stripped based on the payment of schedule payable periodically (Quarterly,
semi-annual, annually, etc.)
b. Inflation-indexed Treasury Bonds
- When rate is
Benign, we use quarterly
Not constant, monthly
Standard, annually
c. Savings Bonds
- 5-10 year, have lower but same computation with that of Treasury Bonds

 Federal Bonds – Not Applicable in the Philippines

 Municipal Bonds – Not Applicable

 Corporate Bonds
 Issued by private corporation for long-term capital requirement
Disposed through
a. Initial Public Offering (IPO) – Here, approval of SEC or Central Bank is needed
b. Private Placement – No need to get approval from SEC and Central Bank

Requirements:

1. Underwriter
 Responsibilities:
a. Study the feasibility of the proposed volume or amount of bonds to be issued.
b. Propose the price viability

2. Bonds Prospectus
 Legal document that contains the ff.
a. Size of the proposed bonds offer
b. Price of the bonds
c. Purpose bonds offer
  Purpose:
a. For securing/Application for bonds offer
b. Serve as initial basis for prospective

3. Bonds Trustee
 Private firms that has the oversight responsibility over the issuance and administration of
bonds starting from its Initial Public Offering (IPO) until Maturity

4. Bonds Indenture
 These are comprehensive legal documents that contain all the rights and obligations of of
both issuer and bondholders
 This is basically the “Bible” of the bonds trustee
 Also includes the characteristics of bonds

Characteristics of Bonds

1. Sinking Fund Provisions

 Requirement of firms to maintain certain amounts of sinking fund for the payment of future
obligation
 Certain amount of earnings is allotted to pay future obligations

2. Protective Provision
 Example: X Corp. is limited only to certain amount of bonus to be given to its employees in order
to protect the earnings of the company from excessive expenditures.

3. Call Provisions
 Example: On periodic basis, a company is required to call back or redeem bonds earlier than the
maturity period.

4. Collateral
 There are 3 classifications of corporate bonds as to collateral:
a. First Mortgage – collateralized by fixed assets (Land, Building, etc.)
b. Chattel Mortgage – collateralized by personal assets
c. Debentures – non-collateralized, based only on bond/credit ratings

5. Convertibility
 Whether preferred or ordinary, bonds may be convertible into stocks

6. Default Provisions
 Example, in case of nonpayment, how much could bondholders receive?
7. Bonds Ratings
Coupons (Indicators: Market rate or inflation rate)
a. Fixed Coupon Rate
b. Variable Coupon Rate
Bondholders have the options to choose among the ff. indicative rate:
 Inflation Rate
 Prevailing Interest rate
 LIBOR (London Interbank Offer Rate)
c. Low-rated or Zero-rated bonds