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a bond is a contract that specifies the terms of an exchange of cash flows. the contract is standardized to the extent possible for liquidity, i.e., low tx cost trading in secondary markets. there are seven major variants of the contract.- residual claims: secured creditors, unsecured creditors, pfd shareholders, common shareholders: stock holders assess risk as uncertainty in future cash flows but bondholders assess risk as probability they will be unable to make interest pmts and uncertainty of value of assets they can seize at default.
- bond covenant restrict managers' ability to disburse funds.
- plain vanilla debenture: cash flow to corporation = market price at issue, cash flow to lender = annuity plus redemption value at expiration date. moodys and s&p ratings measure default risk.
- mortgage bonds: secured with specified assets pledged: less risk, lower yield. but raises riskiness of debentures. used by utilities.
- subordinated debentures: behind debenture holders in the bankruptcy line
- convertible bonds:
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