The document discusses various types of debt securities including: 1) Short and long-term government securities such as treasury bills, notes, bonds, and savings bonds. 2) Short and long-term corporate securities like commercial paper, mortgage bonds, debenture bonds, and convertible debentures. 3) Long-term state and local bonds including general obligation bonds and limited obligation bonds. 4) Factors that determine bond quality ratings including earnings stability and legal protections.

1. Types of Debt Securities
Topic 7

2. I. Short and Long-Term
Federal Government
Securities
A. Treasury Bills Short
B. CD’s Short
C. Treasury Notes Medium
D. Treasury Bonds Long
E. US Savings Bonds Long

3. II. Short and Long-Term
Corporate Securities
 A. Negotiable CD’s Short
 B. Bankers’Acceptances Short
 C. B Commercial Paper Short
 D. Eurodollar Loans Short
 E. Mortgage Bonds Long
 F. Collateral Trust Bonds Long
 G. Debenture Bonds Long
 H. Subordinated Debentures Long
 I. Convertible Debentures Medium

4. III. Long-Term State and
Local Government Securities
A. General Obligation Bonds Long
– The largest category of municipal bonds. They are
secured by the full faith, credit, and taxing power of the
issuing municipality. Payable from unlimited ad
valorem taxes on all taxable property.
B. Limited Obligation Bonds Long
– The principal and interest on these bonds are payable
solely from the revenues produced by the project they
are intended to finance.

5. Note and Bond Quotation
 Date Coupon Bid Ask Change YTM
 2/10 6 3/4 65.17 66.17 -.3 12.00
% of par can be 1000, 5000, 10,000, 20,000,
50,000, 100,000, 1,000,000
Therefore: 65.17 * $1000 = $651.70
The current yield is defined as interest $’s
divided by the cost of the bond (Ask).

6. IV. The Determinants of Bond
Quality Ratings
A. Earnings can be:
– 1. Stable (Paper Industry)
– 2. Seasonal (Farming Industry)
– 3. Cyclical (Housing)
– 4. Erratic (A firm with a few large customers)

7. Riskiness of Bond Issuer’s
Earnings
(EBIT)
TIE = Income for Bond Servicing
Total Interest Payments
The TIE ratio measures the ability to
“cover” the fixed annual interest
payments

8. IV. The Determinants of Bond
Quality Ratings
B. Protective Legal Provisions in the
Indenture
– 1. Subordination
– 2. Call Provision
– 3. Sinking Fund Provision
– 4. Serial Bonds
– 5. Restrictions on Future Issues
– 6. Collateral
– 7. Convertibility (Sweetner)

9. V. Debt Securities Yield and
Return
A. Four ways to measure investment
performance
– 1. Coupon Rate - this is a stated rate and does
not measure performance per se.
– 2. Holding Period Return
– 3. Current Yield
– 4. Yield to Maturity

10. The Federal Reserve
 Federal Reserve Policies: Most monetary analysts agree
that the Fed has no control over long-term interest rates.
Some believe the Fed controls or strongly influences short
rates through its hammer-lock control of the rate on
Federal funds. But we are increasingly finding that the
Fed is more ofter a follower than a leader.
 Interest Rate Spreads: Interest rate spreads offer investors
vital information about the course of the economy and
financial markets and the trend direction in interest rates.
Until early summer, spreads like the differential between
the long T-bond and the Fed funds rate were opening up
enough to cause concern about the Fed change in course to
higher short rates. In recent weeks, most of the spreads
have narrowed, thus lessening the chances of a run-up in
short rates.

11. Bonds: General Information
What you should know about a bond:
All bonds are not created equal. The ability of the
issuer of a bond to meet its obligations vary.
Bonds issued or guaranteed by the United States
government gernerally are considered to be the
safest but that also is beginning to change with
mounting debt.

12. Bonds: Short-Term Strategy
 Investors may be able to improve their overall
yield by shifting their funds among fixed-income
investments.
 The yield spread or difference between yields on
different securities, is the key to flexible portfolio
management.
 As a general rule, maturities should be lengthened
when interest rates are expected to decline and
should be shortened when interest rates are
expected to rise.

13. Review Questions: Topic 7
 Why are T-Bills considered risk free?
 What is the difference between a collateral trust bond and a
mortgage bond?
 The two major types of State and Local government bonds
include:
 A quotation of 87.16 would suggest a price of how much?
 What is the difference between current yield and YTM?
 What is the yield spread on debt securities?