A bond issued at an original issue discount (OID). This means that the interest accumulates but is not paid until maturity; there are no semi-annual coupon payments as with most bonds. These bonds are also referred to as "accrual bonds." |||As accumulation bonds are always sold at an OID, they are always sold below face value, and the IRS considers the OID a form of interest. Even though the bondholder is not receiving coupon payments, the interest on the bond is still accumulating and must be reported as interest income on the bondholder’s tax return each year. Some investors like to use accumulation bonds in their financial plans, as they know the exact amount they will receive at a future point in time when the bond matures, even though they don’t receive interim cash flows.
The gain in the value of a discount bond expected from holding it for any duration until its maturity. |||As discount bonds are sold below face value, it is expected that they will gradually rise in market price until reaching maturity. For example, let's say someone purchases a discount bond with a par value of $1000 for $700. By holding the bond, they can expect a maximum gain of $300. Any appreciation above the $700 paid is called the accrued market discount. This rise in price is different than that which occurs in regular coupon bonds as a result of lowering interest rates.
1. A bond issuance used to pay off another outstanding bond. The new bond will often be issued at a lower rate than the older outstanding bond. 2. A bond issuance in which new bonds are sold at a lower rate than outstanding ones. The proceeds are then invested, and when the older bonds become callable they are paid off with the invested proceeds. |||1. Advance refunding is most often used by governments seeking to postpone their debt payments to the future instead of having to pay off a large amount of debt in the present. 2. Municipal bonds are traditionally exempt from federal tax, but if a municipal bond is issued in an advance refunding it is no longer tax exempt. This is because municipal bonds tend to have lower rates, and municipalities could potentially use advance refunding to issue unlimited amounts of debt at low rates and invest in higher rate investments.
Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring. The debt obligation is consolidated and transferred from the outstanding bond issue to the adjustment bond. This is effectively a recapitalization of the company's outstanding debt obligations, which is accomplished by adjusting the terms (such as interest rates and lengths to maturity) to increase the likelihood that the company will be able to meet its obligations. |||If a company is near bankruptcy and requires protection from creditors (Chapter 11), it is likely unable to make payments on its debt obligations. If this is the case, the company will be liquidated and the value will be spread among its creditors. However, creditors will generally only receive a fraction of their original loans to the company. This is why creditors and the company will work together to recapitalize debt obligations so that the company is able to meet its obligations and continue operations, thus increasing the value that creditors will receive.
A certificate of deposit that allows the bearer to deposit additional funds, after the initial purchase date, that will bear the same rate of interest. |||Add-on's or add-in's to a certificate of deposit are beneficial when investors feel interest rates will decline. By having this feature, the bearer of the CD will be guaranteed a minimum interest rate return. Most financial institutions that permit the use of an add-on feature will require these additional deposits to meet a minimum dollar amount (typically $500).
A hypothesis stating that individuals make investment decisions based on the direction of recent historical data, such as past inflation rates, and adjust the data (based on their expectations) to predict future rates. |||For example, if inflation over the last 10 years has been running in the 2-3% range, investors would use an inflation expectation of that range when making investment decisions. Consequently, if a temporary extreme fluctuation in inflation occurred recently, such as a cost-push inflation phenomenon, investors will overestimate the movement of inflation rates in the future. The opposite would occur in a demand-pull inflationary environment.
A provision included in legal contracts ensuring that subsequent acquisitions of assets will be included in the debtors liability to the lender. |||This is clause is used to provide extra protection to lenders. The clause ensures that new purchases can be seized if previously held loan payments are defaulted. This type of clause is commonly included in bond indentures and mortgage agreements.
A bond that can be redeemed by the issuer at any time prior to its maturity. Usually a premium is paid to the bondholder when the bond is called. |||The main cause of a call is a decline in interest rates since the first date of issue. The issuer would likely call the current bonds and distribute new bonds at a lower interest rate. Unfortunately, these types of bonds pose considerable interest rate risk to bondholders. Also, since the issuer can call the bond at any time before maturity, there is also uncertainty as to when the call (and corresponding interest rate exposure) will occur.
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