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Bonds and their characteristcs


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Financial Management II

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Bonds and their characteristcs

  1. 1. Bonds and Their Characteristics Financial Management 2 K. V. Mendoza, MBA
  2. 2. Bonds and Their Key Characteristics What is Bond? Who Issue Bonds? Key Characteristics of Bonds
  3. 3. What is a Bond? A bond is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond.
  4. 4. Who Issue Bonds? Corporation s Governmen t Agencies
  5. 5. How Bonds Work? For example, on January 3, 2009, Allied Food Products borrowed $50 million by issuing $50 million of bonds. For convenience, we assume that:
  6. 6. How Bonds Work? In any event, Allied received the $50 million; and in exchange, it promised to make annual interest payments and to repay the $50 million on a specified maturity date.
  7. 7. How Bonds Work? Allied sold 50,000 individual bonds for $1,000 each. Actually, it could have sold one $50 million bond, 10 bonds each with a $5 million face value, or any other combination that totalled $50 million.
  8. 8. Classification of Bonds Treasury Bonds-generally called Treasuries and sometimes referred to as government bonds, are issued by the government.
  9. 9. Classification of Bonds Corporate Bonds-are issued by business firms. unlike Treasuries, corporates’ are exposed to default risk.
  10. 10. Classification of Bonds Municipal Bonds-or munis, is the term given to bonds issued by state and local governments.
  11. 11. Classification of Bonds Foreign Bonds-are issued by a foreign government or a foreign corporation.
  12. 12. Key Characteristics of Bonds Par value- is the stated face value of the bond
  13. 13. Key Characteristics of Bonds Coupon Payment- is the specified number of dollars of interest paid each year.
  14. 14. Key Characteristics of Bonds Coupon Interest Payment- the stated annual interest rate on a bond.
  15. 15. Key Characteristics of Bonds Fixed Rate Bond- a bond whose interest rate is fixed for its entire life
  16. 16. Key Characteristics of Bonds Floating Rate Bond- A bond whose interest rate fluctuates with shifts in the general level of interest rates.
  17. 17. Key Characteristics of Bonds Zero Coupon- A bond that pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation
  18. 18. Key Characteristics of Bonds Maturity Date- a specified date on which the par value of a bond must be repaid
  19. 19. Key Characteristics of Bonds Call Provision-a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date. @10Year Bond, 10% annual coupon Par Value = $ 1,000 Call Premium = $ 100 Payment = $ 1,100
  20. 20. Key Characteristics of Bonds Sinking Fund Provision- a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year
  21. 21. Key Characteristics of Bonds  Convertible Bond- bond that is exchangeable at the option of the holder for the issuing firm’s common stock
  22. 22. Key Characteristics of Bonds Warrant- a long-term option to buy a stated number of shares of common stock at a specified price
  23. 23. Key Characteristics of Bonds Putable Bond- a bond with a provision that allows its investors to sell it back to the company prior to maturity at a rearranged price.
  24. 24. Key Characteristics of Bonds Income Bond – a bond that pays interest only if it is earned
  25. 25. Key Characteristics of Bonds  Index (Purchasing Power) Bond – A bond that has interest payments based on an inflation index so as to protect the holder from inflation
  26. 26. end of lecture Just as the rich rule the poor, so the borrower is servant to the lender. Proverbs 22:7