Download BONDS

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 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.
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
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?
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?
Bid
_____ – the highest price that the buyer is willing to pay
_____ – the price asked by sellers
Offer
• 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.
Comprehension, MK p 82
1
2
3
4
5
6
7
8
F
T
T
F
T
F
F
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 37
Based 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 Activity
Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
IV Features of well-organized writing:
The Financing of Corporate Activity
Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
IV 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
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 questions
1British government bonds (______),
__________ grade corporate bonds,
high _________ corporate bonds.
2 a) their price _________ because the British
government is buying gilts back
b) because of __________ companies have to
attract investors by _______ interest rates
c) interest rates paid by risky, non-__________
grade bods are extremely ______
3 To ________ money into the depressed
economy, to _________ it.