bond & stock

8/8/2019 Bond & Stock

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Definition of bond

y Bond is along-term contract under which a borrower

agrees to make payments of interest and principal onspecific dates to the holders of the bond.

y Bonds are issued by corporations and government

agencies that are looking for long-term debt capital.


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Type of bondyTreasury bonds-bond issued by the federal

government,sometimes referred to as

government bonds.yCorporate bonds-bond issued by

corperations.

y

Municipal bonds-bonds issued by state andlocal governments.

yForeign bonds-bonds issued by foreigngovernments or by foreign corporations.


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Characteristic of bondPar value-the par value is the stated face value of the

bond.The par value generally represent the amount ofmoney the firm borrows and promises to repay on the

maturity date.

Coupon interest rate-this payment,generally referred to as thecoupon payment,is set at the time the bond is issued andremains in force during the bond life.typically,at the time a bondis issued,its coupon payment is set at a level that will induce

investors to buy the bond at or near its par value.forexample,allieds bonds have a $1000 par value,and the pay $100 ininterest each year.the bonds coupon payment is $100,so itscoupon interst rate is $100/$1000=10%. In this regard,the $100 isthe annual income that an investor receives when he or sheinvests in the bond.


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y Maturity date-bond generally have a specified maturitydate on which the par value must be repaid.most bondhave original maturities (the maturity at the time the

bond is issued) ranging from 10 to 40 years,but anymaturity is legally permissib

y Call provision-a provision in the bond contract that givesthe issuer the right to redeem the bonds under specifiedterms prior to the normal maturity date.

y Sinking fund provision a provision in a bond contract thatrequires the issuer to retire a portion of the bond issueeach year.


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Stock

yA firms common stockholders have the right to elect

its directors,who,in turn,elect the officers who managethe business.in a small firm,usully the majorstockholder is also the president and chair of the boardof directors.in large,publicly owned firms,themanagers typically have some stock,but their personal

holdings are generally insufficient to give them votingcontrol.thus ,the manegement of most publicly ownedfirms can be removed by the stockholders if themanegement team is not effective.


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Type ofcommon stocky Classified stock-common stock that is given a special

designation such as class A or class B to meet special

needs of the company.

y Founders shares-stock owned by the firm foundersthat has sole voting rights but restricted dividends for

a specified number of years.


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Stock Price versus instrinsic value

y o

Managerial action s the economic

environment,taxes ,and the politicalclimate

true

trueinvestorreturns

truerisk

Perceived

investorreturns

perce

ivedrisk

Stcks intrinsicvalue

Stocks marketprice.

Market equilibrium: intrinsic= stockprice.


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KASIH RAKAN2

bond & stock

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