BONDS

MK, UNIT 16

Debt or Equity?

Bonds are ________, whereas stocks are _______.

By purchasing ________(stock) an investor becomes an owner in a corporation.

By purchasing ________(bonds) an investor becomes a creditor to the corporation (or government).

Investopedia Video

debt equity

WHO DOES WHAT?

…borrows money. …lends money. …pays back the principal. …rates companies. …receives interest (the coupon). …gives low rating to companies with high chance

of default. …pays interest.

The bond issuer

The bondholder

The credit rating agency

The bond issuer

The bondholder

The credit rating agency

• borrows money

• pays back the principal

• pays interest

• lends money

• receives interest (the coupon)

• rates companies

• gives low rating to companies with high chance of default

Bond Issuer/ Bondholder/ Coupon/ Maturity Date/

Bid Price/ Yield

the date on which the borrower will repay the investors their principal.the fixed interest rate that the issuer pays to the lender.the company, state or country issuing the bond.the owner of a corporate or government bond (the lender, the creditor).annual return until the bond matures. the price someone is willing to pay for the bond.

Bond Issuer - the company, state or country issuing the bond.

Bondholder – the owner of a corporate or government bond (the lender, the creditor).

Coupon - the fixed interest rate that the issuer pays to the lender.

Maturity Date - the date on which the borrower will repay the investors their principal.

Bid Price - the price someone is willing to pay for the bond.

Yield - annual return until the bond matures.

Column 1: Issuer

Column 2: Coupon

Column 3: Maturity Date

Column 4: Bid Price

Column 5: Yield

Bond rating agencies / Credit rating agenciesBond rating agencies / Credit rating agencies

‘THE BIG THREE’‘THE BIG THREE’FITCH, MOODY’S, STANDARD & POOR’SFITCH, MOODY’S, STANDARD & POOR’S

Companies that _________________the creditworthiness of both debt securities and their issuers.

Each uses a unique letter-based rating system to quickly convey to investors whether a bond carries a low or high risk of __________and whether the issuer is financially stable.

assess/evaluate/rate

default

READING, MK p. 81

1. How can companies finance their activities?

2. What is the role of investment banks in bond issuing?

3. When is the principal repaid?

4. How often is coupon received?

5. What are Treasury Notes? And Treasury Bonds?

6. What does it mean that bonds are saleable?

7. What do market makers do?

8. What does the price of a bond depend on?

BONDS

For companies For investors

Disadvantages • •

Advantages • • •

BONDS

For companies For investors

Disadvantages • debt increases financial risk

• bondholders do not share in the profits

Advantages • bond interest is tax deductible (interest payments are deducted from profits before paing tax)

• higher claim on assets than shareholders

• steady income stream

Comprehension

Vocabulary

Reading p. 84