Mortgage bonds,collateralized mortgage obligations, asset-backed securities (e.g., CARs andcredit card receivables), and international bonds.

Mortgage Bonds

The issuer of a mortgage bond has granted to the bondholder afirst-mortgage lien on some piece of property or possibly all the firm'sproperty. Such a lien provides greater security to the bondholder and a lowerinterest rate for the issuing firm. Please note that mortgage bonds differ frommortgage-backed securities (see Section C los f) in two aspects:

• Mortgage bonds are collateralized on property of the issuer, not limited to real estate. Mortgage-backed securities are collateralized on mortgage loans.
• Mortgage bonds are serviced by cash flows from the issuer's business operations, not cash flows from the collateral. Mortgage-backed securities are serviced by cash flows from the underlying mortgage loans.

Collateralized MortgageObligations (CMOs)

The main innovation of the CMO instrument is the segmentation ofirregular mortgage cash flows to create securities that are high-quality,short-, medium- and long-term collateralized bonds. Specifically, CMO investorsown bonds that are collateralized by a pool of mortgages or by a portfolio ofmortgage-backed securities. The bonds are serviced with the cash flows fromthese mortgages, but rather than the straight pass-through arrangement, the CMOsubstitutes a sequential distribution process that creates a series of bondswith varying maturities to appeal to a wider range of investors.

Asset-Backed Securities(ABSs)

They involve securitizing debt.

• Certificates for automobile receivables (CARs): CARs are securities collateralized by loans made to individuals to finance the purchase of cars. They are serviced by the cash flows from the underlying pool of automobile loans. They typically have monthly or quarterly fixed interest and principal payments. The stated maturities of CARs are typically 3 to 5 years. However, the underlying automobile loans are often paid off early when cars are sold or traded in. Therefore, most CARs have expected weight average lives of 1 to 3 years. The cash flows of CARs are comparable to short-term corporate loans.

• Credit card receivables: Because the nature of the loan, credit card receivables are considered to be a revolving credit ABS, in contrast to auto loan receivables that are referred to as an installment contract ABS. The principal payments from credit card receivables are not paid to the investor but are retained by the trustee to reinvest in additional receivables. The indenture specifies (1) the intended maturity for the security; (2)the "lockout period" during which no principal will be paid; and (3) the structure for repaying the principal after the lockout period. The accumulated principal can be paid in a single lump sum at maturity, or amortized monthly over a specified period.

Important characteristics ofthe corporate bond markets in Japan, Germany, the United Kingdom, and the U.S.

In the US corporate bond market:

• There are four major segments: utilities, industrials, transportation, and financial companies.
• Industrials typically have the lowest average yield, followed by utilities, financial issues, and finally transportation issues.
• Maturities of corporate bonds range from 25 to 40 years. Corporate bonds with maturities of 5 to 7 years are typically noncallable.
• Most bonds have semiannual interest payments, a single maturity date, sinking funds, and 5 - 10 year deferred calls.

The corporate bond market in Japan is made up of two components: (1) pure corporation bonds, which arebonds issued by industrial firms or utilities and (2) bank bonds, which are bondsissued by banks to finance loans to corporations. They are regulated by theKisaikai, a council composed of 22 bond-related banks and seven majorsecurities companies. Samurai bonds are yen-denominated bonds sold bynon-Japanese issuers and mainly sold in Japan.Euroyen bonds are yen-denominated bonds sold in market outside Japan byinternational syndicates.

In Germany nonbank corporate bonds are almost nonexistent. All deutschemarkbonds of foreign issuers can be considered Eurobonds.

Corporate bonds in the UK are available in three forms: debentures, unsecured loans andconvertible bonds. They are issued through both public offerings and privateplacements. UK foreign bonds, referred to as bulldog bonds, aresterling-denominated bonds issued by non-English firms and sold in London.