UNIT THE CAPITAL AND BOND MARKET

LEARNING OBJECTIVES

After studying this unit, you should be able to:

define the notion of capital market;

state the purpose of capital market;

be aware of the capital market instruments

distinguish between the primary market and the secondary market for

securities

define the terminology related to capital and bond market;

outline the main participants of capital market;

define main types of bonds.

STARTING-UPLook at the following headlines. What are these articles about? (Use Helpful Vocabulary Box). Comment on the following news.

Eurozone problems weigh heavily on equity capital marketsGeraldine Lambe | 01/02/2012 9:01 am

Belize nears defaulting on bond paymentThreat to withhold coupon casts cloud over restructuring talksAug 2012

US pensions buy 30-year bonds Low borrowing costs drive companies to sell long-term debt Aug 2012

Debt crisis sends European blue-chips to bonds Continental groups turn to capital markets as banks restrict lendingAug 2012

TEXT

Short-term securities that trade in a market we call the money market. Capital markets are for securities with an original maturity that is greater than one year. These securities include bonds, stocks, and mortgages.

Firms and individuals use the money markets primarily to warehouse funds for short periods of time. By contrast, firms and individuals use the capital markets for long-term investments.

Capital Market Participants

The primary issuers of capital market securities are federal and local governments and corporations. The federal government issues long-term notes and bonds to fund the national debt. State and municipal governments also issue long-term notes and bonds to finance capital projects, such as school and prison construction. Governments never issue stock because they cannot sell ownership claims.

Corporations issue both bonds and stock. One of the most difficult decisions a firm faces can be whether it should finance its growth with debt or equity. The distribution of a firm's capital between debt and equity is its capital structure. Corporations may enter the capital markets because they do not have sufficient capital to fund their investment opportunities. Alternatively, firms may choose to enter the capital markets because they want to preserve their capital to protect against unexpected needs. In either case, the availability of efficiently functioning capital markets is crucial to the continued health of the business sector.

The largest purchasers of capital market securities are households. Frequently, individuals and households deposit funds in financial institutions that use the funds to purchase capital market instruments such as bonds or stock.

Capital Market TradingCapital market trading occurs in either the primary market or the secondary

market. Investment funds, corporations, and individual investors can all purchase securities offered in the primary market. You can think of a primary market transaction as one where the issuer of the security actually receives the proceeds of the sale. When firms sell securities for the very first time, the issue is an initial public offering (IPO). Subsequent sales of a firm's new stocks or bonds to the public are simply primary market transactions (as opposed to an initial one).

The capital markets have well-developed secondary markets. It is important because most investors plan to sell long-term bonds before they reach maturity and eventually to sell their holdings of stock as well. Whereas most money market transactions originate over the phone, most capital market transactions, measured by volume, occur in organized exchanges. An organized exchange has a building where securities (including stocks, bonds, options, and futures) trade. Exchange rules govern trading to ensure the efficient and legal operation of the exchange, and the exchange's board constantly reviews these rules to ensure that they result in competitive trading.

TYPES OF BONDSBonds are securities that represent a debt owed by the issuer to the investor.

Bonds obligate the issuer to pay a specified amount at a given date, generally with periodic interest payments. The par, face, or maturity value of the bond is the amount that the issuer must pay at maturity. The coupon rate is the rate of interest that the issuer must pay. This rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates. If the repayment terms of a bond are not met, the holder of a bond has a claim on the assets of the issuer. Look at Figure 1. The face value of the bond is given in the top right corner. The interest rate, along with the maturity date, is reported several times on the face of the bond.

Long-term bonds traded in the capital market include long-term government notes and bonds, municipal bonds, and corporate bonds.

Bonds are loans from the bondholder (buyer) to the issuer (seller). A bond is a promise by the issuer to pay back the amount loaned to it (called principal) plus an agreed to amount of interest on or before a stated date. The interest may be paid periodically during the life of the loan or all at once when the loan is paid back. Bonds are also called fixed income instruments, because the amount of income that the bond will generate is fixed by the stated interest rate of the bond. The date when the loan becomes due is called the maturity date of the bond. The loan is represented by a physical piece of paper and if it pays interest periodically during the life of the loan, the certificate may also consist of coupons.

Coupons are detachable from the bond certificate itself, usually by a perforation, and are presented to the paying agent of the issuer, usually a commercial bank, for payment. For this reason they are called coupon bonds. While coupon bonds are no longer widely used, the amount of interest that a bond pays is still known as the coupon rate and the bond is still known as a coupon bond.

Bonds are also identified by the way they are owned. Bearer bonds, for example, belong to the person who holds them and ownership is not otherwise recorded. Eurobonds are issued in this format. While this form of ownership carries the risk of loosing the certificate, it offers the highest degree of anonymity and that is why in some countries, the United States for example, they are no longer allowed.

The other common type of format is a fully registered bond, either in certificate form or in book entry. The owner’s name is recorded with a transfer agent and interest payments are made either by check or electronic credit. The book entry method, where no certificate is issued and ownership is recorded in a ledger, is growing in popularity because it reduces transfer costs, simplifies handling, and decreases the probability of loosing the certificate or having it stolen.

Type Maturity

Treasury bill

Less than 1 year

Treasury note

1 to 10 years

Treasury bond

10 to 20 years

Source: Eakins, Finance: Investments, Institutions, &

Management, p. 39.

table 3 bond terminology

Treasury Bonds. The U.S. Treasury issues notes and bonds to finance the national debt. The difference between a note and a bond is that notes have an original maturity of 1 to 10 years while bonds have an original maturity of 10 to 20 years. Table 1 summarizes the maturity differences among Treasury securities.

Federal government notes and bonds are free of default risk because the government can always print money to pay off the debt if necessary.' This does not mean that these securities are risk-free. Treasury bonds have very low interest rates because they have no default risk. Most of the time the interest rate on Treasury notes and bonds is above that on money market securities because of interest-rate risk.

Municipal bonds are securities issued by local, county, and state governments. The proceeds from these bonds are used to finance public interest projects such as schools, utilities, and transportation systems. Municipal bonds are issued to pay for essential public projects. This allows the municipality to borrow at a lower cost because investors will be satisfied with lower interest rates on tax-exempt bonds.

There are two types of municipal bonds: general obligation bonds and revenue bonds.

General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment. Instead, they are backed by the "full faith and credit" of the issuer. This phrase means that the issuer promises to use every resource available to repay the bond as promised. Most general obligation bond issues must be approved by the taxpayers because the taxing authority of the government is pledged for their repayment.

Revenue bonds, by contrast, are backed by the cash flow of a particular revenue-generating project. For example, revenue bonds may be issued to build a toll bridge, with the tolls being pledged as repayment. If the revenues are not sufficient to repay the bonds, they may go into default, and investors may suffer losses. Municipal bonds are not default-free. Unlike the federal government, local governments cannot print

money, and there are real limits on how high they can raise taxes without driving the population away.

Corporate Bonds. When large corporations need to borrow funds for long periods of time, they may issue bonds. Most corporate bonds have a face value of $1000 and (twice per year). Most are also callable, meaning that the issuer may redeem the bonds after a specified date.

The bond indenture is a contract that states the lender's rights and privileges and the borrower's obligations. Any collateral is offered as security to the bondholders. The degree of risk varies widely among issues because the risk of default depends on the company's health, which can be affected by a number of variables. The interest rate on corporate bonds varies with the level of risk. Bonds with lower risk and a higher rating (AAA being the highest) have lower interest rates than more risky bonds (BBB). A bond's interest rate will depend on its features and characteristics, which are described in the following sections. ( see the table in the section of supplementary materials).

Conversion. Some bonds can be converted into shares of common stock. This feature permits bondholders to share in the firm's good fortunes if the stock price rises. Most convertible bonds will state that the bond can be converted into a certain number of common shares at the discretion of the bondholder. The conversion ratio will be such that the price of the stock must rise substantially before conversion is likely to occur.

Types of Corporate Bonds. A variety of corporate bonds are available. They are usually distinguished by the type of collateral that secures the bond and by the order in which the bond is paid off if the firm defaults.

Secured Bonds. Secured bonds, such as mortgage bonds and equipment trust certificates are ones with collateral attached.

Mortgage bonds are used to finance a specific project. For example, a building may be the collateral for bonds issued for its construction. In the event that the firm fails to make payments as promised, mortgage bondholders have the right to liquidate the property in order to be paid. Because these bonds have specific property pledged as collateral, they are less risky than comparable unsecured bonds. As a result, they will have a lower interest rate.

Equipment trust certificates are bonds secured by tangible non-real-estate property, such as heavy equipment or airplanes. Typically, the collateral backing these bonds is more easily marketed than the real property backing mortgage bonds. As with mortgage bonds, the presence of collateral reduces the risk of the bonds and so lowers their interest rates.

Unsecured Bonds. Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer. No specific collateral is pledged to repay the debt. In the event of default, the bondholders must go to court to seize assets. Collateral that has been pledged to other debtors is not available to the holders of debentures. Debentures usually have attached to them a contract that spells out the terms of the bond and the responsibilities of management. The contract attached to the debenture is called an indenture. (Be careful not to confuse the terms debenture and indenture.) Debentures have lower priority than secured bonds if the firm defaults. As a result, they will have a higher interest rate than otherwise comparable secured bonds.

Variable-rate bonds (which may be secured or unsecured) are a financial innovation stimulated by increased interest-rate variability in the 1980s and 1990s. The

interest rate on these securities is tied to another market interest rate, such as the rate on Treasury bonds, and is adjusted periodically. The interest rate on the bonds will change over time as market rates change.

Junk Bonds All bonds are rated by various companies according to their default risk. These

companies study the issuer's financial characteristics and make a judgment about the issuer's possibility of default. A bond with a rating of AAA has the highest grade possible. Bonds at or above Moody's Baa or Standard and Poor's BBB rating are considered of investment grade. Those rated below this level are usually considered speculative (see the table in the section of supplementary materials).

Speculative-grade bonds are often called junk bonds. Before the late 1970s, primary issues of speculative-grade securities were very rare; almost all new bond issues consisted of investment-grade bonds. However, when companies ran into financial difficulties, their bond ratings would fall. Holders of these downgraded bonds found that they were difficult to sell because no well-developed secondary market existed. It is easy to understand why investors would be leery of these securities, as they were usually unsecured.

Financial Guarantees for BondsFinancially weaker security issuers frequently purchase financial guarantees to

lower the risk of their bonds. A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults. Large, well-known insurance companies write what are actually insurance policies to back bond issues. With such a financial guarantee, bond buyers no longer have to be concerned with the financial health of the bond issuer. Instead, they are interested only in the strength of the insurer. Essentially, the credit rating of the insurer is substituted for the credit rating of the issuer. The resulting reduction in risk lowers the interest rate demanded by bond buyers. Of course, issuers must pay a fee to the insurance company for the guarantee. Financial guarantees make sense only when the cost of the insurance is less than the interest savings that result.

WORDLIST FOR THE TEXT

1. a ledger – книга обліку2. a number of variables – велика кількість факторів3. a toll bridge - платний міст4. at the discretion of the bondholder – за розсудом власника облігації5. backed by the "full faith and credit" of the issuer - забезпечення облігацій

усіма доходами та запозиченнями емітента6. backed only by the general creditworthiness of the issuer – бути

забезпеченим лише загальною кредитоздатністю емітента7. be leery of these securities – підозріло ставитися до цінних паперів8. callable - підлягає викупу9. claim on the assets – право на активи10. conversion ratio – ставка обміну облігацій на акції11. corporate bonds - корпоративні облігації12. covenant - стаття контракту, умова за договором, зобов’язання за

договором, згода на емісію13. debenture – облігація акціонерної компанії, незабезпечене боргове

зобов’язання 14. downgraded bonds – облігації з заниженим рейтингом 15. equipment trust certificates – облігації, забезпечені обладнанням16. exchange's board – рада правління біржі17. finance the growth with debt or equity - фінансувати своє зростання за

рахунок боргових зобов’язань або акцій18. fixed income instruments - інструменти з фіксованим доходом19. future – ф’ючерс20. general obligation bond - облігації, випущені адміністрацією штату, або

муніципалітетом, звільнені від оподаткування21. heavy equipment важка техніка22. holdings of stock - володіння акціями23. indenture – контракт на випуск облігацій, договір (домовленість) про

емісію облігацій24. interest payments are made either by check or electronic credit - виплата

відсотків проводиться за допомогою чеку або їх записом на поточний рахунок власника

25. junk bond – високоприбуткова, але дуже ризикована облігація26. long-term government notes and bonds - довгострокові державні цінні

папери та облігації27. maturity value - номінальна вартість 28. municipal bonds - муніципальні облігації29. non-real-estate property - майно, що не відноситься до нерухомості30. option - опціон31. ownership claims - претензії на власність32. perforation - перфорація33. pledged as security – заставлений у якості забезпечення34. proceeds of the sale - доходи від продажу35. registered bond - іменна облігація36. repayment - виплата, погашення.37. repayment terms умови погашення, виплати38. result in competitive trading – призводити до конкурентних торгів39. revenue bond – облігація забезпечена доходами від певного об’єкту40. secured bond – забезпечена облігація41. stimulated by increased interest-rate variability – поява,стимульована все

більш зростаючими коливаннями у відсоткових ставках42. subsequent sales - наступні продажі43. tangible -матеріальний44. the book entry method - бездокументарний метод реєстрації активів45. the coupon rate - ставка купона46. the highest degree of anonymity -найвищий ступінь анонімності47. to be described in the indenture – бути описаним у контракті на емісію

облігацій

48. to deposit funds in financial institution – вкладати кошти у фінансові установи

49. to ensure the efficient and legal operation of the exchange - для забезпечення ефективної та правової роботи біржі

50. to exempt from federal taxation – звільняти від федеральних податків51. to pay interest semiannually – виплачувати відсоток кожні півроку52. to seize assets - заволодіти активами53. to share in the firm's fortunes – приймати участь у прибутках фірми54. to spell out the terms of the bond – зазначити умови облігації55. treasury bonds – казначейські облігації56. treasury notes – казначейські білети57. unsecured bond – незабезпечена облігація

EXERCISES

1. Find in the text Ukrainian equivalents to the following words and word combinations and translate the sentences in which they are used.

Capital markets; mortgage; capital structure; proceeds of the sale; to reach maturity; exchange's board; the coupon rate; claim on the assets; fixed income instruments; bearer bonds; a ledger; Treasury notes; a superior claim on the assets of the issuer; municipal bonds; pledged as security; backed by the "full faith and credit" of the issuer; callable; a number of variables; to seize assets; to spell out the terms of the bond; to be leery of the securities; stimulated by increased interest-rate variability; to share in the firm's fortunes ; treasury bonds ; unsecured bond ; general obligation bond; conversion ratio; to pay interest semiannually; at the discretion of the bondholder; perforation.

2. Find in the text English equivalents to the following words and word combinations. Write your own sentences using them.

Іменна облігація; бездокументарній метод реєстрації активів; фінансувати своє зростання за рахунок боргових зобов’язань або акцій; наступні продажі; володіння акціями; для забезпечення ефективної та правової роботи біржі; номінальна вартість; довгострокові державні цінні папери та облігації; найвищий ступінь анонімності; виплата відсотків проводиться за допомогою чеку або їх записом на поточний рахунок власника; виплата (погашення); платний міст; облігації з заниженим рейтингом; важка техніка; вкладати кошти у фінансові установи; бути описаним у контракті на випуск облігацій; матеріальний; контракт на випуск облігацій; облігація акціонерної компанії; звільняти від федеральних податків; забезпечена облігація; облігації, забезпечені обладнанням; високоприбуткова, але дуже ризикована облігація.

3. Here are some word-combinations from the text. Match and translate them

into Ukrainian.

1. the coupon a. method

2. the book entry b. security

3. pledged as c. ratio

4. to share in d. claim

5. conversion e. the firm's fortunes

6. ownership f. rate

4. Match the sentence beginnings (1- 5) with the correct endings (a –e).1. The U.S. Treasury issues notes and bonds 2. Bearer bonds, for example, belong to the person 3. If the repayment terms of a bond are not met, 4. The coupon rate is the rate of interest 5. Equipment trust certificates are bonds secured by

a. the holder of a bond has a claim on the assets of the issuer.b. to finance the national debt.c. that the issuer must pay.d. who holds them and ownership is not otherwise recorded.e. tangible non-real-estate property, such as heavy equipment or airplanes.

5. Match words and phrases in the box with their definitions.

1. Covenant a. a contract in which the writer (seller) promises that the contract buyer has the right, but not the obligation, to buy or sell a certain security at a certain price (the strike price) on or before a certain expiration date, or exercise date.

2. Revenue bond

b. a bond with a low rating.

3. Junk bond c. a bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed.

4. Treasury notes

d. assets pledged as security for a loan.

5. Mortgage bond

e. a debt security, issued by a government or large company, that is not secured by an asset or lien, but rather by the all issuer's assets not otherwise secured.

6. Unsecured Bond

f. the contract that accompanies a bond and specifies the terms of the loan agreement.

7. Indenture g. a clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made.

8. Variable-rate bond

h. the method where the security certificate is not actually given to the holder.

9. The book entry method

i. a debt security backed by the full faith and credit of the United States government with a maturity between one and 10 years.

10. Futures j. note whose interest payment varies with short-term interest rates.

11. Collateral k. involve a financial contract that requires the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a specific price on a predetermined date in the future.

12. Option l. long-term bond secured by the payments on one or more mortgages.

5. Fill in the table with the appropriate descriptions of the bond

terminology.

1. Coupon interest rate

a. The contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenants.

2. Current yield

b. The yield an investor will earn if the bond is purchased at the current market price and held until maturity.

3. Face amount c. The interest rate currently in effect in the market for securities of like risk and maturity. The market rate is used to value bonds.

4. Indenture d. The same as face amount.

5. Market rate

e. The maturity value of the bond. The holder of the bond will receive the face amount from the issuer when the bond matures. Face amount is synonymous with par value.

6. Maturity

f. The stated annual interest rate on the bond. It is usually fixed for the life of the bond.

7. Par valueg. The number of years or periods until

the bond matures and the holder is paid the face amount.

8. Yield to maturity h. The coupon interest payment divided by the current market price of the bond.

6. Answer the questions.1. Contrast investors' use of capital markets with their use of money markets.2. A bond provides information about its par value, coupon interest rate, and maturity date. Define each of these.3. The U.S. Treasury issues bills, notes, and bonds. How do these three securities differ?4. What is the purpose of municipal bonds? Distinguish between general obligation bonds and revenue bonds.5. What does the phrase backed by the full faith and credit of the issuer mean?6. What features do corporate bonds share?7 What is the bond indenture?8. What is collateral?9. What are the main types of corporate bonds?10. Distinguish between mortgage bonds and equipment trust certificates? 11. Define the main types of unsecured bonds.12. Explain the meaning of speculative-grade bonds (junk bonds)?13. What financial institutions can provide financial guarantees for bonds?

7. Complete the sentences, using expressions from the box. Translate the sentences into Ukrainian.

Coupons, bearer, bonds, The Internal Revenue Service, registered bonds, mergers, restrictive covenants, moral hazard problem, dividends, interest payments, the bond indenture, bondholders, "coupon interest payment," gets into trouble, the corporation's stockholders.

Characteristics of Corporate Bonds

At one time bonds were sold with attached ______that the owner of the bond clipped and mailed to the firm to receive interest payments. These were called _______because payments were made to whoever had physical possession of the bonds. __________did not care for this method of payment, however, because it made tracking interest income difficult. Bearer bonds have now been largely replaced by_________, which do not have coupons. Instead, the owner must register with the firm to receive________. The firms are required to report the name of the person who receives interest income. Despite the fact that bearer bonds with attached coupons have been phased out, the interest paid on bonds is still called the __________ and the interest rate on bonds is the coupon interest rate.A corporation's financial managers are hired, fired, and compensated at the direction of the board of directors, which represents_________. This arrangement implies that the managers will be more interested in protecting stockholders than they are in protecting bondholders. You should recognize this as an example of the__________. Managers may not use the funds provided by the bonds as the bondholders might prefer. Since _________cannot look to managers for protection when the firm_________, they must include rules and restrictions on managers designed to protect the bondholders' interests. These are known as__________. They usually limit the amount of dividends the firm can pay and the ability of the firm to issue additional debt. Other financial policies, such as the firm's involvement in________, may also be restricted. Restrictive covenants are included in________. Typically, the interest

rate will be lower the more restrictions are placed on management through restrictive covenants because the bonds will be considered safer by investors.

8. Match the responses on the right with the questions on the left.

1. So what exactly are bonds?

a. Because of changes in interest rates. For example, no-one will pay the full price for a 6% bond if new bonds are paying 10%.

2. And how do they work? b. Exactly. And the opposite, a bond whose market value is higher than its face value, is above par.

3. So you have to keep them for a long time?

c. I knew you'd finish by saying that!

4. Why should that happen?

d. No, not at all. Bonds are very liquid. They can be sold on the secondary market until they mature. But of course, the price might have changed.

5. Oh, I see. Is that what they mean by below par?

e. No, not unless it's a floating rate bond. The coupon, the amount of interest a bond pays, remains the same. But the yield will change.

6. But the bond's interest rate doesn't change?

f. No, those are short-term (three-month) instruments which the government sells to and buys from the commercial banks, to regulate the money supply.

7. How's that? g. That's the name they use in Britain for long-term government bonds — gilts or gilt-edged securities. In the States they call them Treasury Bonds.

8. And people talk about AAA and AAB bonds, and things like that

h. They're securities issued by companies, governments and financial institutions when they need to borrow money.

9. And what about gilts? i. Well, a bond's yield is its coupon payment expressed as a percentage of its price on the secondary market, so the yield changes if you buy or sell above or below par.

10. Not Treasury Bills? j. Well, they usually pay a fixed rate of interest and are repaid after a fixed period, known as their maturity, for example five, seven, or ten years.

11. And James Bondk. Yes. Bond-issuing companies are given an

investment grade by private ratings companies such as Standard & Poors, according to their financial situation and performance.

1 2 3 4 5 6 7 8 9 10 11

9. Complete the following.1. Companies generally use investment banks to.…..their bonds.2. Thereafter, they can be traded on the.....market.3. The amount of interest a bond pays is often called its.4. The majority of bonds have a......rate of interest.5. A bond's.............depends on the price it was bought at.6. A bond priced at 104% is described as being. . .7. Bonds are repaid at 100% at.........8. AAA is the highest............

10.Answer the questions. Look at the text to help you.

1. Which is the safest for an investor?

A a corporate bond В a junk bond С a government bond

2. Which is the cheapest way for a company to raise money?

A a bank loan В an ordinary bond С a convertible bond

3. Which gives the highest potential return to an investor?

А a corporate bond B a junk bond С a government bond

4. Which is the most profitable for an investor if interest rates rise?

A a Treasury bond В a floating rate note С Treasury note

11.Translate into English.

Світовий ринок облігацій

Однією із складових світового фінансового ринку є ринок капіталів, на якому формуються попит і пропозиція на середньострокові та довгострокові фінансові активи. На ринку капіталів обертаються цінні папери (акції, облігації, похідні цінні папери (деривативи), векселі, депозитарні розписки) терміном більше одного року. До світового ринку капіталів належать, зокрема, ринок єврооблігацій, ринок євроакцій, ринок євровекселів та євроринки інших фінансових інструментів, які обертаються більше одного року. Ринок євровекселів почав формуватися 1981 року з появою коротко- та довгострокових євровекселів.

На світовому ринку облігацій обертаються два види цінних паперів: іноземні облігації та єврооблігації. Основна відмінність між ними у тому, що перші продаються на певній біржі, тоді як другі не обов'язково котируються у певному географічному місці. На сучасному етапі емісія єврооблігацій значно перевищує емісію іноземних облігацій.

Іноземні облігації — це цінні папери, випущені нерезидентом у національному фінансовому центрі в національній валюті. Їх емісія регламентується законодавством по цінних паперах країни-емітента, але на практиці їх обіг значною мірою відповідає принципам євроринків. Залежно від країни емісії іноземні облігації можуть мати спеціальні назви: Yankee Bonds — у США, Samourai Bonds — в Японії, Bulldog Bonds — у Великобританії, Chocolate Bonds — у Швейцарії.

Єврооблігації є борговими зобов'язаннями, що випускаються позичальником для отримання довгострокової позики на євроринку. Як правило, такі облігації розміщуються одночасно на фінансових ринках декількох країн. Валюта єврооблігаційної позики для кредиторів є іноземною, хоча для окремих кредиторів може бути й національною. Гарантійне розміщення єврооблігацій здійснюється емісійним синдикатом.

Єврооблігації мають декілька різновидів:—звичайні облігації з фіксованою відсотковою ставкою на весь період позики;— облігації з плаваючою відсотковою ставкою (використовуються у період різких коливань відсоткових ставок); — облігації, що конвертуються в акції; цей вид облігацій приносить їх власнику дохід менший, ніж попередні два види, але через певний термін власник облігацій має право обміняти їх на акції компанії-позичальника; — облігації з нульовим купоном, відсотки по яких враховуються при встановленні емісійного курсу; за певних умов такі облігації надають їх власникам додаткові пільги; — облігації, що поєднують риси наведених вище видів облігацій.

12. Mark these statements T (true) or F (false) according to the information studied in the text and in the exercises. Correct them where necessary.

1. The capital markets exist to provide financing for short-term capital assets. Households, often through investments in pension and mutual funds, are net investors in the capital markets. Corporations and the federal and state governments are net users of these funds.

2. The three main capital market instruments are bonds, stocks and mortgages. Bonds represent borrowing by the issuing firm. Stock represents ownership in the issuing firm. Mortgages are long-term loans secured by real property.

3. Only corporations can issue stock.

4. Corporations can issue bonds. In any given year, far more funds are raised with

bonds than with stock.

5. Bondholders must rely on a contract called a debenture to protect their interests.

6. Bond indentures contain covenants that restrict the firm from activities that increase risk and hence the chance of default on the bonds. Bond indentures also contain many provisions that make them more or less attractive to investors, such as a call option, convertibility, or a sinking fund.

1. The value of bonds doesn’t fluctuate with current market prices.

LISTENING

13. A). Listen to the text and answer the questions. What does call provision state? What are the reasons that issuers of bonds include call provisions? What is a sinking fund? Why do firms still typically issue callable bonds?

B). Now listen again, and complete the sentences with the necessary word combinations from the list.

a call provisioncallable bonds capital structurecorporate indentures coupon rate debt load investment opportunities.reduce the bond's interest ratetaking out a loan the appreciation of a bond's pricethe call pricethe covenants the sinking fundto expand its storage facilitiesto retire a bond issue

CALL PROVISIONSMost ________include________, which states that the issuer has the right to force the holder to sell the bond back. The call provision usually requires a waiting period between the time the bond is initially issued and the time when it can be called. The price bondholders are paid for the bond is usually set at the bond's par price or slightly higher (usually by one year's interest cost). For example, a 10% ________$1000 bond may have a call price of $1100.

If interest rates fall, the price of the bond will rise. If rates fall enough, the price will rise above_______, and the firm will call the bond. Because call provisions put a limit on the amount that bondholders can earn from ____________________investors do not like call

provisions.A second reason that issuers of bonds include call provisions is to make it possible for

them ________their bonds according to the terms of________. A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year. This provision is attractive to bondholders because it reduces the probability of default when the issue matures. Because a sinking fund provision makes the issue more attractive, the firm can_____________.

A third reason firms usually issue only __________is that firms may have _____________of the issue restrict the firm from some activity that it feels is in the best interest of stockholders. Suppose that a firm needed to borrow additional funds___________. If the firm's bonds carried a restriction against adding debt, the firm would have to retire its existing bonds before issuing new bonds or __________to build the new warehouse.

Finally, a firm may choose to call bonds if it wishes to alter its_______. A maturing firm with excess cash flow may wish to reduce its _________if few attractive _________are available.

Because bondholders do not generally like call provisions, callable bonds must have a higher yield than comparable non callable bonds. Despite the higher cost, firms still typically issue callable bonds because of the flexibility this feature provides the firm.

C). Explain the following word combinations. a call provision the call price the sinking fund covenants to retire a bond issue callable bonds

TERMS FOR TEXT

Bearer bond - a fixed-income instrument that is owned by whoever is holding it, rather than having a registered owner.capital structure - the distribution of a firm's capital between debt and equityCollateral - assets pledged as security for a loan Corporate Bond - a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.Coupon - the contractual interest obligation a bond or debenture issuer covenants to pay to its debt holders. The interest paid on a bond. That is, the coupon is the amount that the issuer must pay to the holder of each bond in exchange for investing in that bond.Covenant - a clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made. Essentially, covenants spell out what the borrower may do and must do in order to satisfy the terms of the loan. Debentures - are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer

Equipment trust certificates - are bonds secured by tangible non-real-estate property, such as heavy equipment or airplanes.Futures - involve a financial contract that requires the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a specific price on a predetermined date in the future.General obligation bond - usually refers to government bonds and are backed by the full faith and credit of the taxing power (country, municipality, etc.) that issues them.Indenture - the contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenants.Interest payment - the charge for the privilege of borrowing money, typically expressed as an annual percentage rate. The amount of ownership a stockholder has in a company, usually expressed as a percentage.Investment funds - money that is invested with an expectation of profitInvestments - the act of investing money, b. the amount invested, c. an enterprise, asset, etc., in which money is or can be invested 2. a. the act of investing effort, resources, etc. b. the amount investedIssuer - an organization that registers, distributes, and sells a security on the primary market. An issuer can be a private company or a government.Junk bond – a bond with a low rating. They have higher yields because they have a higher risk of default on the part of the issuer. High-yield bonds are considered sufficiently high-risk that the law does not allow banks to invest in them. Mortgage bond - a long-term bond secured by the payments on one or more mortgages.Municipal bond - are securities issued by local, county, and state governmentsOption - a contract in which the writer (seller) promises that the contract buyer has the right, but not the obligation, to buy or sell a certain security at a certain price (the strike price) on or before a certain expiration date, or exercise date. Registered bond – a bond whose issuer records ownership and interest paymentsRevenue bond – a bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed.Secured bond – is the one with collateral attached.The bond indenture - the contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenantsThe book entry method – the method where the security certificate is not actually given to the holder. Instead, the holder is given a receipt and the information is held electronically. Book-entry securities have become more common as computers become more sophisticated and exchanges increasingly decide to close their trading floors.Treasury bonds – a debt security backed by the full faith and credit of the United States government with a maturity of more than 10 years. They may be purchased directly from the government or from a bank; they have coupon payments payable every six months.Treasury notes - a debt security backed by the full faith and credit of the United States government with a maturity between one and 10 years. They may be purchased directly from the government or from a bank; they have coupon payments payable every six months.Unsecured bond – a debt security, issued by a government or large company, that is not secured by an asset or lien, but rather by the all issuer's assets not otherwise secured.

SUPPLEMENTARY TASKS

1. Study the images of the given bonds. Define their types,

denomination| (face value), maturity, interest rates, issuers, and other

information.

2. Write a summary in 50 words, using helpful phrases given below. Translate the text into English.

Облігація — цінний папір, що засвідчує внесення її власником грошових коштів і підтверджує зобов'язання відшкодувати йому номінальну вартість цього цінного папера в передбачений у ньому термін з виплатою фіксованого процента (якщо інше не передбачено умовами випуску). Дата, яка встановлена умовами випуску як дата відшкодування вартості облігації, називається датою погашення, а вартість, за якою погашається облігація, — вартістю погашення. Як правило, вартість погашення дорівнює номінальній вартості облігації.

Облігація є одним з найпоширеніших інструментів боргу. Емітентами облігацій можуть виступати держава та підприємства всіх передбачених законом форм власності. Облігації підприємств, або корпоративні облігації, є одним із способів формування позикового капіталу, основою якого є коротко-, довгострокові кредити та боргові цінні папери.

Державні облігації гарантуються всім майном держави і призначені для залучення коштів на міжнародному (облігації зовнішньої позики) або внутрішньому

фінансових ринках. Кошти, одержані від їх реалізації, надходять до місцевих бюджетів та позабюджетних фондів.

Державні облігації менш ризикові, ніж корпоративні. У держави, навіть у найскрутнішій економічній ситуації, існує можливість розрахуватись за борговими зобов'язаннями за рахунок випуску нових боргових зобов'язань або додаткової емісії грошей. Як наслідок, рівень доходу за державними облігаціями меншиий від рівня доходу за корпоративними облігаціями.

Існує два основних типи облігацій: процентні та безпроцентні, або дисконтні. За процентними облігаціями періодично через певний термін має сплачуватись визначений в умовах випуску процент, який називають купонним. Якщо процентна облігація запропонована для відкритого продажа з подальшим вільним обігом, вона повинна мати купонний лист на виплату процентів. Купони на виплату процентів на дату чергового платежу відрізаються і пред'являються для оплати. Частіше за такими облігаціями сплачується фіксований процент, який визначається емітентом в умовах емісії, хоча може сплачуватись і змінний процент, який підлягає зміні через визначені інтервали часу.

За безпроцентними облігаціями, або облігаціями "з нульовим купоном", процентні виплати не здійснюються, проте такі облігації продаються за ціною, меншою від ціни погашення. В такому разі кажуть, що облігація продається зі знижкою, або дисконтом.

Облігації, як і інші цінні папери, випускаються іменні та на пред'явника. Облігації підприємств можуть бути як іменними, так і на пред'явника, а облігації внутрішніх республіканських та місцевих позик випускаються тільки на пред'явника.

Найбільш розповсюдженими є лише декілька основних видів облігацій з відносно стандартними назвами:

іпотечні облігації; облігації під заставу фондових паперів; облігації під заставу обладнання; незабезпечені облігації; інші види облігацій.

Іпотечні облігації являють собою боргові зобов’язання, що забезпечені майном підприємства (емітента). У випадку її банкрутства або неплатіжоспроможності утримувачі облігацій мають право на отримання цього майна, яке вони можуть продати для задоволення своїх претензій. Утримувачі іпотечних облігацій під заставу майна, як правило, захищені умовами облігаційного договору.

Незабезпечені облігації являють собою облігації під загальне зобов’язання емітента, що їх випускає і за суттю є незабезпеченим кредитом

Конвертовані облігації можуть бути, за бажанням їх власника, обмінені на інші цінні папери, як правило звичайні акції (того ж емітента).

Helpful phrases for writing a summary.

Key words and phrases for annotations

The article deals with The paper focuses on is devoted to gives a survey of … considers throws light on outlines analyses The author (also) studies … as well. examines presents dwells upon explains points out compares and contrasts shows determines substantiates stresses emphasises proposes

Key words and phrases for annotations(in passive)The development analyzedThe process studied The problems examinedThe tendencies investigatedThe experience tracedThe results of is describedThe data in smth ( also ) given The analysis for are shownThe approaches definedThe attempts determinedThe present condition compared and The basic aspects contrastedThe reasons considered The research under consideration The main directions presentedThe requirements outlinedThe specific features explainedThe distinctions proposedThe modern state systematizedThe objective reflectedThe measuresThe significance stressed

The importance for emphasizedThe role of smth revealedThe nature smth is substantiatedThe essence are provedThe necessity in groundedThe influence onThe dependence

3. Questions for reasoning and discussion.

1. As interest rates in the market change over time, the market price of bonds rises and falls. The change in the value of bonds due to changes in interest rates is a risk incurred by bond investors. What is this risk called?

2. In addition to Treasury securities, some agencies of the government issue bonds. List three such agencies, and state what the funds raised by the bond issues are used for.

3. A call provision on a bond allows the issuer to redeem the bond at will. Investors do not like call provisions and so require higher interest on callable bonds. Why do issuers continue to issue callable bonds anyway?

4.What is a sinking fund? Do investors like bonds that contain this feature?

5. What is the document called that lists the terms of a bond?

6. Describe the two ways whereby capital market securities pass from the issuer to the public.

table DEBT RATINGS

Standardand Poor's Moody's Definition

AAA Aaa Best quality and highest rating. Capacity to pay interest and repay principal is extremely strong. Smallest degree of investment risk

AA Aa High quality. Very strong capacity to pay interest and repay principal and differs from AAA/Aaa in a small degree

A A Strong capacity to pay interest and repay principal. Possess many favorable investment attributes and are considered upper-medium-grade obligations. Somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions

BBB Baa Medium-grade obligations. Neither highly protected nor poorly secured. Adequate capacity to pay interest and repay principal. May Lack Long-term reliability and protective elements to secure interest and principal payments.

BB Ba Moderate ability to pay interest and repay principal. Have speculative elements and future cannot be considered well assured. Adverse

business, economic, and financial conditions could lead to inability to meet financial obligations.

B B Lack characteristics of desirable investment. Assurance of interest and principal payments over long period of time may be small. Adverse conditions Likely to impair ability to meet financial obligations.

CCC Caa Poor standing. Identifiable vulnerability to default and dependent on favorable business, economic, and financial conditions to meet timely payment of interest and repayment of principal.

CC Ca Represent obligations that are speculative to a high degree. Issues often default and have other marked shortcomings.

C C Lowest-rated class of bonds. Have extremely poor prospects of attaining any real investment standard. May be used to cover a situation where bankruptcy petition has been filed, but debt service payments are continued.

CI Reserved for income bonds on which no interest is being paid. Payment default.

NR No public rating has been requested.

(+) or (—) Ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.