Chapter 6 - Fixed-income securities: characteristics and valuation. This chapter focuses on the characteristics and valuation of fixed-income securities: long-term debt preferred stock | 6 Fixed-Income Securities: Characteristics and Valuation Introduction This chapter focuses on the characteristics and valuation of fixed-income securities. Long-term debt Preferred stock Classification of Long-Term (L-T) Debt When a company borrows money in the capital markets, it issues long-term debt securities to investors. These bonds are usually sold in denominations of $1,000 and constitute a promise by the issuing company to repay a certain amount of money (the $1,000 principal) on a particular date (the maturity date) and to pay a specific amount of interest at fixed intervals (usually twice a year). Classification of Long-Term (L-T) Debt Most debt has a par value of $1,000, and debt prices are often expressed as a percentage of that value. For example, a market price listing of “87” indicates that a $1,000 par value bond may be purchased for $870. Classification of Long-Term (L-T) Debt Mortgage bonds are secured by specific physical assets of the issuing company. Debentures or debenture bonds are unsecured by specific physical assets of the issuing company. Classification of Long-Term (L-T) Debt At the present time, utility companies are the largest users of mortgage bonds. In recent years, the use of mortgage bonds relative to other forms of long-term debt has declined, whereas the use of debentures has increased. Classification of Long-Term (L-T) Debt Because debentures are unsecured, their quality depends on the general creditworthiness of the issuing company. As a result, they are usually issued by large, financially strong firms. Classification of Long-Term (L-T) Debt The yield differential between the mortgage bond and debenture alternatives is another example of the risk-return trade-off that occurs throughout finance. Classification of Long-Term (L-T) Debt For example, suppose Midstates Oil company could issue either mortgage bonds or debentures. If the mortgage bonds could be sold with a 10 percent interest rate, the debentures would have to be . | 6 Fixed-Income Securities: Characteristics and Valuation Introduction This chapter focuses on the characteristics and valuation of fixed-income securities. Long-term debt Preferred stock Classification of Long-Term (L-T) Debt When a company borrows money in the capital markets, it issues long-term debt securities to investors. These bonds are usually sold in denominations of $1,000 and constitute a promise by the issuing company to repay a certain amount of money (the $1,000 principal) on a particular date (the maturity date) and to pay a specific amount of interest at fixed intervals (usually twice a year). Classification of Long-Term (L-T) Debt Most debt has a par value of $1,000, and debt prices are often expressed as a percentage of that value. For example, a market price listing of “87” indicates that a $1,000 par value bond may be purchased for $870. Classification of Long-Term (L-T) Debt Mortgage bonds are secured by specific physical assets of the issuing company. Debentures .
