BONDS, PREFERRED STOCKS AND COMMON STOCK

1. Bonds, Preferred
Stocks & Common
Stocks

2. Corporate Bonds
Roselle

3. DEFINITION OF BOND
 A bond is defined as a long-term debt of
a firm or the government set forth in
writing and made under seal.
KINDS OF BOND
1. Government Bonds
2. Corporate Bonds

4. Government Bonds are those
issued by the government to
finance its activities.
Corporate Bonds are those
issued by private corporations to
finance their long-term funding
requirements.

5. BONDS AS DISTINGUISHED FROM
STOCKS
1. A bond is a debt instrument, while stock is
an instrument of ownership;
2. Bondholders have priority over
stockholders when payments are made by
the company;
3. Interest payments due to bonds are fixed,
while dividends to stockholders are
contingent upon earnings and must be
declared by the board of directors;

6. 4. Bonds have specific maturity date, at
which time, repayment of the principal is
due. In contrast, stocks are instruments of
permanent capital financing and does not
have maturity dates;
5. Bondholders have no vote and no
influence on the management of the firm,
except when the provision of the bond and
the indenture agreement are not met.

7. ALTERNATIVE WAYS OF BOND
ISSUANCE
1. Public offering
2. Private placement
 Public Offering involves selling of corporate
bonds to general public through investment
bankers. The investment banker provides
assistance in the issuance of bonds by:
 1. helping the firm determine the size of the
issue and the type of bonds to be issued;
 2. establishing the selling price;
 3. selling the issue

8.  Private Placement is a sale of bonds directly to
an institution and is a private agreement
between the issuing company and the financial
institution without public examination.
Private placement offers the following
advantages:
1. the issue can be tailor-made to fit the needs of
the issuing firm, as well as the investing firm;
2. the issue does not have to be registered;
3. there are no underwriting fees paid by the
issuing firm.

9. Ronette
CLASSES OF
BONDS

10. 1. By type of security
2. By manner of
participation in earnings
3. By method of retirement
or repayment

11. Classification of Bonds as to Type of Security
1. Earnings and general unpledged assets of issuing company
(debentures);
2. Earnings of issuing company plus pledge of specific property
(mortgage bonds)
This is further classified as follows:
Real estate morgages (senior or junior liens)
i. Closed-end issues
ii. Open-end issues
b. Chattel morgages
3. All or some of original secuirty plus general credit of another company
which may be:
a. Assumed bonds
b. Guaranteed bonds
4. Combined earnings of allied companies plus collateral protection in
some cases (joint bonds).

12.  Debentures. Debenture bonds are general
credit bonds not secured by specific property.
 Mortgages Bonds. Mortgage bonds are those
which are secured by a lien on specifically
named property such as land, buildings,
equipment, and other fixed assets. Mortgage
Bondholders have a prior claim to the assets
specifically pledged as security.
The specific property pledged are of two general types:
1. real estate – which consist of land and property
attached to land;
2. chattels – which consist of personal and movable
property.

13. Real estate mortgages may also be
classified according to priority of
claims:
1. Senior liens (first mortgage bonds). They
are those having prior claim to fixed assets
pledged as security.
2. Junior liens (second mortgage or third
mortgage bonds). They are bonds having
subsequent liens to fixed assets pledged as
security.

14. Real estate mortgages may also be
classified according to type of issue:
1. Closed-end issue. This type of issue refers to
those wherein subsequent issues on the specific
property pledged as collateral are not allowed.
2. Open-end issue. This type of bond issue permits
the issuance of additional bond issues or series to
be made undre the original mortgage secured by a
single lien.
3. Limited open-end issue. This is an improvement
of the open and closed issues allowing additional
bonds to be sold after maximum amount.

15.  Assumed Bonds. There are times when a
corporation buys another corporation, or is
merged with another.
 Guaranteed Bond. A guaranteed bond is a
type of bond in which the payment of interest,
or special, or both, is guaranteed by one or
more individuals or corporations.
 Joint Bonds. There are times when a
property is owned jointly by several
companies.

16. Classes of Bonds
by Method of
Retirement
Bangs

17.  SERIAL BONDS- which mature semi-annually
or annually instead of all on a single date. The
effect of maturity in series is the staggered
repayment schedule of the obligation.
 SINKING FUNDS BONDS- this provision
requires the issuer to deposit annually certain
sums of money with the trustee of the issue for the
retirement of the part of issue before maturity.
4 Types of Sinking Funds
 Quota-Based Sinking Funds
 Callable Bonds
 Balance Accumulation
 Purchase Price Based Sinking Funds

18.  CALLABLE BONDS- with provisions that the
terms of the issue can be cancelled or called. The call
privilege enables the issuing company to pay off a
bond issue.
 CONVERTIBLE BONDS- bonds which may
be exchanged for the common stock of issuing
corporation at a fixed price at a pre-determined
redemption date, and the option of the bondholder.
 PERPETUAL BONDS- bonds which cannot
be determined by demanding repayment. This type
of bond has no place in the finance of private
businesses. It is primarily suited to the field of
public finance where the debtor, the government,
may be assumed to have a permanent existence.

19. REASONS FOR THE USE OF BONDS
1. When a franchise or a license is issued to a
corporation providing a guarantee of a certain
return on capital investment;
2. When economic conditions allow the payment
of interests at a rate lower than what is paid to
common stock in the form of dividends;
3. When the present owners of the corporation
want to retain their share of voting power;
4. When investor resistance to the purchase of
common stock is very strong; and when such
resistance is not found in the sales of bonds;

20. 5. When the degree of safety offered by the
issuer attracts investors;
6. When the tax advantages are derived
from the exercise ;
7. When there is a sufficient demand from
institutional investor like banks,
insurance companies, and pre-need
firms.