Download Financial statements

• Securities*:
- Stocks – equity financing
- Bonds – debt financing
- money market instruments:
• (derivatives, futures, options)
- * vrijednosnice, vrijednosni papiri
STOCKS & SHARES (1)
private
1. Most companies begin as …………….
limited companies.
raise
2. If they want to grow they must ……….
capital.
3. One way to obtain capital for growth is to
go public, i.e. apply to the stock exchange to
………..
become a public limited comp.
4. Smaller or newer companies usually sell
their shares on the over-the-counter
………….……. markets.
REVISION
FOUR TYPES OF ORGANISATIONS IN
THE PRIVATE SECTOR
1) WITH UNLIMITED LIABILITY
Sole proprietorship
• __________________
Partnership
• ______________
2) WITH LIMITED LIABILITY
Private limited company
• ___________________
Public limited company
• ___________________
REVISION
LIMITED vs. UNLIMITED
LIABILITY FOR DEBT
In businesses with limited liability, owners
are responsible* for their company’s debts
up to a certain amount if it goes out of
business, and do not have to sell their
personal assets to repay the debts.
liable
* ______
Source: Longman Business English Dictionary
LIMITED COMPANIES
entity (independent legal existence from its
• a legal ______
shareholders)
• shareholders have limited liability (liable for the
invested
amount of capital ________)
liquidated and
• in case of bankruptcy, assets are __________
the company is wound up.
•
•
•
•
•
•
LIMITED COMPANIES
up the capital (divided into shares)
owners put ___
vote at
shareholders can _______the
AGM and take a
share of the profit through dividend
of Directors and a
shareholders elect a Board
_______________
Chairperson
appoint
the BoD ________managers
to run day-to-day
business
drawn up : the
documents which need to be ________
Memorandum of Association and Articles of
Association
Registrar of Companies issues a Certificate of
Incorporation
PRIVATE →PUBLIC LIMITED COMPANY
FLOTATION / IPO / GOING PUBLIC
• change a private company into a public company
by issuing shares and soliciting the public to
purchase them
 The bank has closed its initial public offer early
because of overwhelming demand from investors.
 The price of the company’ shares on the day it
floated on the stock market beat all expectations.
 Investors expected the share price to rise steeply
after the company went public.
 Source: Longman Business English Dictionary
 MK, p 87: Reading Stocks and Shares
STOCKS & SHARES (2)
5. Issuing shares for the first time is known as
floating a company (making a …….........)
flotation or
…………
_
_.
I P_ O
6. To guarantee to purchase all the securities at an
agreed price on a certain day, if they cannot be
underwrite
sold to the public: to
……………..
VOCABULARY
Companies going public…
•
•
•
•
i____
ssue shares
pply to a stock exchange
a_____
oin over-the-counter market
j____
pply to be quoted or listed on a stock
a____
exchange
ulfill a large number of requirements
• f_____
se an investment bank to u________the
nderwrite
• u___
issue
Synonyms
British English
companies
shares/stock
EQUITIES
shareholders
ordinary shares
preference shares
flotation
Annual General Meeting
Articles of Association
Memorandum of Assoc.
authorised share capital
property
American English
corporations
stocks
stockholders
common stock
preferred stock
initial public offering
Annual Stockholders M.
Bylaws
Certificate of Incorporation
authorized capital stock
real estate
BONDS
MK, U 16 (p 81)
Bonds
• What?
• Who?
• Why?
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
Debt Finance vs. Equity Finance (MK, p.81)
• Scan the text for comparison
Debt Finance vs. Equity Finance (MK, p.81)
BONDS
ADVANTAGE
DISADVANTAGE
FOR INVESTORS FOR ISSUERS
Debt Finance vs. Equity Finance (MK, p.81)
BONDS
ADVANTAGE
FOR INVESTORS FOR ISSUERS
generally safer
bond interest is tax
deductible
WHAT DOES IT
MEAN?
DISADVANTAGE
shares pay a
higher return
debt increases a
company’s
financial risk
HOW?
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?
dged stock (UK)
Treasury notes, treasury bonds and gilt-e_____
• Who are market makers?
rokerage companies which q____
uote bid and offer price.
Banks & b________
• Bid vs. offer price?
Bid
_____ – the highest price that the buyer is willing to pay
_____ – the price asked by sellers
Offer
• What is a spread?
ifference between the bid & offer prices (bid/ask or buy/sell)
D________
• What is inversely related?
nterest r____
ate in the economy & the price of existing bonds.WHY?
I_____
• What is the yield of a bond and what does it depend on?
ncome given by a bond. It depends on its c______
oupon and its
I______
purchase price.
More about bonds (MK, p.81)
• Meaning of T-notes, T-bonds and gilts?
Treasury notes, treasury bonds and gilt-edged stock (UK)
• Who are market makers?
Banks & brokerage companies which quote bid and offer price.
• Bid vs. offer price?
Bid – the highest price that the buyer is willing to pay
Offer – the price asked by sellers
• What is a spread?
Difference between the bid & offer prices (bid/ask or buy/sell)
• What is inversely related?
Interest rates in the economy & the price of existing bonds.WHY?
• What is the yield of a bond and what does it depend on?
Income given by a bond. It depends on its coupon and its
purchase price.
Comprehension & vocabulary, MK p 82
1
2
3
4
5
6
7
8
F
T
T
F
T
F
F
F
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
The Financing of Corporate Activity, RB p 37
Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
Match headings with paragraphs
Text headings:
• Corporate finance
• Stocks vs. Bonds
• Bond risks
The Financing of Corporate Activity
Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
Features of well-organized writing:
1.
2.
3.
4.
Text headings
Topic sentences
Paragraphing
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
-ownership
vs.
BONDS
-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
-ownership
vs.
BONDS
-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
Introduction to Bonds (video)
WATCH: 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____
ebt instrument issued by governments,
corporations and other entities in order to
oan that
finance projects or activities. A l____
investors make to the bond’s i______.
ssuers
Term used for the price of a bond on primary
market?
ace value.
• F____
What is the face value of a bond?
ent
• The amount l_____
to the issuer.
What does the investor receive in exchange for
the loan?
• Interest, known as c______.
oupon
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
aid
specified period of time.
Maturities mentioned?
• 1 year, 3 years or 30 years
Coupons 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.
• HW: MK, p 83 (tasks) – 84 (three ads)
Reading: How to profit from bonds
- read the ads on p 84
- answer questions
- vocabulary
Intro to stocks?
CORPORATE FINANCE, R p 37:
Corporations (PLC’s) finance their activities in three
____
different ways. Internally, out of ________
undistributed
corporate
borrowing
________ profits
_____ and externally, by _________
from financial institutions such as commercial
savings & ____
loan ___________
associations* or
banks, _______
insurance companies. Finally, corporations can
stocks & _______.
bonds
issue ______
* štedno kreditna zadruga
STOCKS VS. BONDS
• A stock is an ________
ownership _____
share while a
lending
bond is not. A bond purchaser is ______
money to a corporation.
• The stated value of a bond when it is first
face / par / nominal value.
issued is its _______________
• The amount lent to the corporation is the
principal and the corporation promises to
______
repay it at a specified future date, also
maturity date.
known as the bond’s ______
• The bondholder also receives annual
interest payments.
______
STOCKS VS. BONDS, cont.
risky for two
• Bonds are considered to be less ______
reasons:
stockholders only after
1. Dividends can be paid to ___________
the interest rates due to bondholders have been
paid. This means that bondholders have a legally
_____
prior _____.
claim
_____
2. If the corporation runs into problems,
dividends and the
stockholders may receive no ________
plummet / plunge / sink
value of their stock may ___________________.
Unless the corporation goes bankrupt,
bondholders are guaranteed a fixed interest rate
principal at _______.
maturity
and the return of the _______
BOND RISKS – finish the sentences
Corporate bonds are not ....
riskless. The market value of bonds...
varies over time in accordance with ...
the financial health of the corporation.
If the corporation falls on hard times and its financial
integrity is shaken....
the market value of your bond may....
fall. Selling the bond on the bond market prior to...
maturity (for less than its...
nominal value) will cause...
a capital loss.
BOND RISKS, cont.– finish the sentences
Market prices of bonds are also affected by...
changes in interest rates. Increases in interest
rates cause bond prices to ...
fall. Decreases in interest rates cause ...
bond prices to rise. In other words, the market
value of a bond rises if it pays a ...
higher fixed interest rate than the current interest
rate.
Bondholders face another element of risk due to...
inflation. Substantial inflation will diminish the ...
purchasing power of the...
principal. You will have lent “dear” dollars, but...
will be repaid in “cheap” dollars.
SECURITIES* (part II): BONDS (U16)
DEBT FINANCING ( = loans)
Risk rating: AAA (best) to C (worst)
Companies:
BONDS
an interest paying
loan
which can be traded
on bond markets
securities, papers
* vrijednosnice
HW: MK 2a, 2b & 2c
Governments:
LONG-TERM BONDS:
GILTS – GB
TREASURY BONDS-USA
SHORT-TERM BONDS:
TREASURY BILLS (3-MONTH)
Stocks vs. Bonds (video ex.)
WATCH: http://www.investopedia.com/video/play/stocksversus-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.