BONDS

MK, U 16 (p 81)

What? Who? Why? • borrowing/lending:

face value (principal)

coupon (interest rate)• bond issuers

governments (government bonds)

companies (corporate bonds)

• bondholders

-individuals & institutional investors

-selling or holding bonds until maturity

Introduction to Bonds (video) http://www.investopedia.com/video/play/understanding-bonds

• Definition of bonds?• Term used for the price of a bond on the

primary market? • Maturities mentioned?• Coupons mentioned?• Why do corporations/governments issue

bonds?• What is important to remember about bonds?

What is a bond?• A d____ instrument issued by governments,

corporations and other entities in order to finance projects or activities. A l____ that investors make to the bond’s i______.

Term used for the price of a bond on primary market?

• F____ value. What is the face value of a bond?• The amount l_____ to the issuer.What does the investor receive in exchange for

the loan?• Interest, known as c______.

What is maturity?• The time when a financial instrument (such as

a bond or an insurance policy) becomes ready to be p_____. Bonds are issued for a specified period of time.

Maturities mentioned?• 1 year, 3 years or 30 yearsCoupons menioned?• 8%Why do corporations/govts. issue bonds?• To fund capital projects / public projects

What is important to remember about bonds?

• The higher the interest rate, the more/less risk it is likely to carry.

• The higher the interest rate, the more risk it is likely to carry.

Debt Finance vs. Equity Finance

• Reading: BONDS (MK, p.81)

• Two main ways governments can raise money?

• Two main ways established companies can raise money?

Debt Finance vs. Equity Finance(MK, p.81)

BONDS FOR INVESTORS FOR ISSUERS

ADVANTAGE

DISADVANTAGE

Debt Finance vs. Equity Finance(MK, p.81)

BONDS FOR INVESTORS FOR ISSUERS

ADVANTAGEgenerally safer bond interest is tax

deductibleWHAT DOES IT MEAN?

DISADVANTAGEshares pay a higher return

debt increases a company’s financial riskHOW?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?

• Who are market makers?

• Bid vs. offer price?

• What is a spread?

• What is inversely related?

• What does the yield of a bond depend on?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)• Who are market makers?Banks & b________ companies which q____ bid and offer price.• Bid vs. offer price?_____ – the highest price that the buyer is willing to pay

_____ – the price asked by sellers• What is a spread?D________ between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?I_____ r____ in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?I______ given by a bond. It depends on its c______ and its

purchase price.

Bid

Offer

Comprehension, MK p 82

1 F

2 T

3 T

4 F

5 T

6 F

7 F

8 F

Vocabulary, MK p 82

1 cash flow 2 equity

3 mutual funds 4 pension funds

5 principal 6 maturity

7 coupon 8 insolvent or bankrupt

9 creditors 10 dividends

11 market makers 12 bid / bid price

13 offer / offer price 14 yield

Match up verbs with nouns

borrow money deduct interest payments

finance activities issue shares

issue bonds pay (a rate of) interest

pay a (higher) return pay dividends

pay tax receive interest payments

raise money repay principal sell assets

deduct tax receive dividends repay bonds

repay money sell bonds

• HW: Reading, pp 83-84– Read three extracts on p 83– Answer questions– Vocabulary

Bonds cont.

Financing corporate activity

RB pp 37-38

The Financing of Corporate Activity, RB p 37Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

II Match headings with paragraphs

Text headings:• Corporate finance• Stocks vs. Bonds• Bond risks

III Explain words and expressions

The Financing of Corporate ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

IV Features of well-organized writing:

The Financing of Corporate ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

IV Features of well-organized writing:

1. Text headings

2. Topic sentences

3. Paragraphing

4. Connectors

CORPORATE FINANCE• Full text: Generally speaking, ...... three

different ways... First, ..., Second, ..., For example, ...Third,...

• Notes:

THREE WAYS OF CORPORATE FINANCE: 1.2. .... (e.g. ...)3.

CORPORATE FINANCE• Full text: Generally speaking, ...... three

different ways... First, ..., Second, ..., For example, ...Third,...

• Notes: THREE WAYS OF CORPORATE FINANCE:

1. internally, out of undistributed corporate profits

2. borrowing from financial institutions (e.g. a commercial bank, a savings and loan association, an insurance company)

3. issuing common stocks and bonds

STOCKS VS. BONDS• Full text: In contrast, ..., For example, ... This means that...

There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other, ....

• Notes:

STOCKS vs. BONDS

-ownership -lending-less risky: 1.

2.

STOCKS VS. BONDS• Full text: In contrast, ..., For example, ... This means that...

There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other, ....

• Notes:

STOCKS vs. BONDS

-ownership -lending-less risky: 1. legally prior

claim 2. income

“guaranteed”

Bond risks• Full text: clear paragraphing & topic sentences

• Notes:

CORPORATE BOND RISKS

1.

2.

3.

Bond risks• Full text: clear paragraphing & topic sentences

Notes:

CORPORATE BOND RISKS

1. market value of bonds may fall, selling before maturity may cause you to incur a capital loss

2. price of existing bonds varies inversely with with interest rates in the economy

3. inflation

HW check: Reading, pp 83-84

• Vocabulary

• Answers to questions

CASE STUDY, pp 84-85

Stocks vs. Bonds (video ex.) http://www.investopedia.com/video/play/stocks-versus-bonds

• Stocks and bonds are the two biggest 1… of most 2 … . Stocks usually provide a steady 3…, and bonds tend to ensure a 4…. . Bonds can be bought from 5…, and a careful selection of stocks will include 6… . A combination of stocks and bonds is good for all kinds of investors. For aggressive investors, bonds may 7... the risk of stocks and stabilize the 8… of the market, while stocks can help 9…. investors 10… against the risk of inflation.

HW check: Reading, pp 83-84• Vocabulary• Answers to questions1British government bonds (______),

__________ grade corporate bonds,high _________ corporate bonds.

2 a) their price _________ because the British government is buying gilts backb) because of __________ companies have to attract investors by _______ interest ratesc) interest rates paid by risky, non-__________ grade bods are extremely ______

3 To ________ money into the depressed economy, to _________ it.