Bonds – long term debt instrument in which a borrower agrees to
make payment of principal and interest to the holders of the bond
Bond Market

Primarily traded in the over-the-counter market

Owned by and traded among large financial institutions

Wall Street Journal – reports key developments in treasury,
corporate, and municipal markets
Key Components of Bond

Issuer – entity that borrows money

Investor – entity that lends the money

Par value (Principal) – face amount of bond which is paid at
maturity

Coupon interest rate – stated interest rate paid by issuer

Coupon payment – regular interest payments made to the
investor

Maturity date – years until bond must be repaid

Issue date – when the bond was issued

Yield to maturity (Promised yield) – rate of return earned on
a bond held until maturity
Sinking Fund – provision to pay off a loan over its life rather than all at
maturity
Types of Bonds

By Issuer
o
Government Bonds – issued by national, state, or
local government (less risky than corp bonds) e.g.,
U.S. treasury bonds, municipal bonds
o
Corporate Bonds – issued by companies to raise
capital for operations and expansions. E.g., Apple,
Microsoft, Amazon

By Maturity
o
Short Term Bonds – mature less than a year (Tbills)
o
Medium Term Bonds – mature 1 to 10 years (Tnotes)
o
Long Term Bonds – mature more than 10 years (Tbonds)

By Interest Payment
o
Coupon Bonds – pay a fixed rate at regular
intervals
o
Zero-coupon Bonds – do not pay periodic interest
payments

By Security
o
Secured Bonds – backed by specific assets of the
issuer
o
Unsecured Bonds – not backed

By Other Features
o
Callable Bonds – allows issuer to redeem the
bonds before maturity at predetermined price
o
Convertible Bonds – allows bondholder to convert
bonds into shares of issuer’s stock at
predetermined price
o
Inflation-indexed Bonds – adjust the principal
amount and interest payments to account for
inflation
o
Warrant – long term option to buy a stated number
of shares of common stock at a specified price
o
Puttable Bond: allows holder to sell the bond back
to the company prior to maturity.
o
Income Bond: pays interest only when interest is
earned by the firm.
o
Indexed Bond: interest paid is based upon the
rate of inflation.
Bond Valuation

Current Yield = Annual coupon payment (Face Value x Rate)
/ Current Price

Capital Gains Yield = Change in price/ Beginning Price

Expected Total Return (YTM) = CY + CGY
Default Risk – if an issuer defaults, investors receive less than
promised return.
Factors affecting default risk

Financial performance
o
Debt ratio
o
Times interest earned ratio
o
Current ratio

Qualitative factors: Bond contract provisions
o
Secured vs. Unsecured debt
o
Senior vs. subordinated debt
o
Guarantee and sinking fund provisions
o
Debt maturity

Miscellaneous qualitative factors
o
Earnings stability
o
Regulatory environment
o
Potential antitrust or product liabilities
o
Pension liabilities
o
Potential labor problems
o
Accounting policies
Challenges of Bonds in Sports Business

Interest Rate Risk - Bondholders require a return on their
investment, meaning teams must pay interest, which can
impact their profitability.

Regulatory Requirements: Issuing bonds can be complex
and require compliance with various regulations, adding to
the administrative burden.

Market Volatility: The value of bonds can fluctuate based on
market conditions, potentially impacting a team's financial
stability
Stocks
Facts about Common Stock

Represent ownership

Ownership implies control

Stockholders elect directors

Directors elect management

Management’s goal: Maximize the stock price
Intrinsic value and Stock Price

Undervalued - stocks with a price below intrinsic value

Overvalued - stocks with a price above intrinsic value
Value of a stock is the PV of the future dividends expected to be
generated by stocks.
If g > rs, constant growth formula leads to negative stock price.
Required rate of return (rs) = rRF + (rM – rRF) b
Expected dividend stream
Intrinsic Value = D1/rs-g
Corporate value model (free cash flow method) - suggests the value of
the entire firm equals the present value of the firm’s free cash flows
Issues regarding the corporate value model

Often preferred to the dividend growth model, especially
when considering number of firms that don’t pay dividends or
when dividends are hard to forecast.

Similar to dividend growth model, assumes at some point
free cash flow will grow at a constant rate.

Terminal value (TVN) represents value of firm at the point that
growth becomes constant.
Preferred stock - hybrid security
2 ways to invest in stocks
1. Direct Stock Investing
2. Indirect Stock Investing (Mutual Funds) – an investment
company that pools or combines money of several investors
Advantages of Mutual Fund

Professional Management

Diversification

Liquidity

Accessible and Affordable

Safety

NAVPS is net of TAX
Basic Types of Mutual Funds

Money Market

Bond Fund

Equity Fund

Balanced Fund