TYPES OF BONDS
  A. Mortgage bonds: bonds secured by 
    real property
  B. Equipment trust certificates: bonds 
    secured by equipment (rolling 
    stock)
  C. Debentures: unsecured bonds (no 
    collateral).
  D. Revenue bonds: interest paid only if 
    a specified level of earnings is 
    achieved
       TYPES OF BONDS
  E. Convertible bonds: bonds that may 
    be converted into the firm's 
    common stock
  F. Variable interest rate bonds: 
    coupons that change with changes 
    in interest rates
  G. Zero coupon bonds (also called pure 
    discount bonds): don’t pay coupons.
  H. Callable Bonds: can be “called” 
    prior to stated maturity (early 
    redemption).
      CHARACTERISTICS OF ALL DEBT 
              INSTRUMENTS
   A. Pay Interest (coupons) and have a fixed 
     maturity value ($1000 for corporate 
     bonds).
   B. Indenture Agreement
     1.  Loan agreement between lender and 
       borrower.
     2.  Appoints the trustee; a fiduciary responsible 
       for guarding the lenders' interests.
     3. Indenture agreement provides for legal 
       remedies if terms & conditions of indenture 
       are not met. 
     4. May specify call provisions
     5. May require a sinking fund or serial 
       redemption
      CHARACTERISTICS OF ALL DEBT 
              INSTRUMENTS
   C. Sources of risk
     1. Default; probability of not getting all of the 
       promised interest and principal.
     2. Price; changes in prices as interest rates 
       change over time. The longer the time to 
       maturity, the greater the sensitivity. (See Fig 
       7-3)
     3. Purchasing power; effects on inflation on 
       buying power of coupon income.
     4. Liquidity: inability to buy or sell at intrinsic 
       value due to inactive market or small float.
      BOND VALUES AND BOND YIELDS 
     A. Bond valuation model; 
         1. VB = Coupon * PVIFA + Face Value * PVIF 
         2.  The value of a bond (VB) is a combination of a present 
             value of an annuity (PV of  coupons to be received) 
             and PV of face value of the bond. VB is also the PV of 
             all expected cash flows
                N      CF
       V                   n        for n  1, 2, 3, ..., N
         B     (1k )n
               n1          b