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.