Securities
• Securities*:- Stocks – equity financing- Bonds – debt financing- money market instruments:
• (derivatives, futures, options)
- * vrijednosnice, vrijednosni papiri
BONDS
MK, U 16 (p 81)
Bonds• What?
• Who?
• Why?
What? A bond is a debt instrument:• borrowing/lending:
face value (principal)
coupon (interest rate)
Who?• bond issuers
governments (government bonds)
companies (corporate bonds)
• bondholders
- individuals & institutional investors
-selling or holding bonds until maturity
Why?
Definition of 'Debt Instrument'• A paper or electronic obligation that enables the issuing
party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower.
Interesting collocations
the ________ party (bond issuer)
to raise ______
to promise to _______ a _______
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______.
ebt
oanssuers
ent
oupon
ace
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
aid
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
generally safer
shares pay a higher return
bond interest is tax deductibleWHAT DOES IT MEAN?
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)dged
SECURITIES* (part II): BONDS (U16) DEBT FINANCINGDEBT FINANCING ( = ( = loans)
Risk rating: AAA (best) to C (worst)
Companies:
BONDSan interest paying
loan
which can be traded
on bond markets
securities, papers
* vrijednosnice
Governments:
LONG-TERM BONDS:
GILTS – GB
TREASURY BONDS-USA
SHORT-TERM BONDS:
TREASURY BILLS (3-MONTH)
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.
dged
rokerage uote
Bid
Offer
ifference
nterest ate
ncome oupon
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 payOffer – 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, MK p 82
Comprehension, MK p 82
1 F
2 T
3 T
4 F
5 T
6 F
7 F
8 F
Vocabulary, p 82
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, 82
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 p37Based 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 ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
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 interest rates in the economy
3. inflation
Friday, 10 May 2013Progress test: REPORT (20 points)
1st PT: 40 + Report: 20 + 2nd PT: 40 = 100 (51 = pass)
Task: A choice of two
Time: 45 min
Elements of grading:Headings: ½ each (wording and position) – maximum 3 pts
Phrases: min 1 per section – 1 point each (correctly used)*
Content: graded on a scale form 0 to 3
Vocabulary: graded on a scale from 0 to 3
Grammar: graded on a scale from 0 to 3
Spelling: graded on a scale from 0 to 3
*Chance to win up to 3 bonus points.