Bonds bonds. Plan.

1. Ways of raising capital.

   1. How do companies raise capital?

- revenue from sales of goods and services

- issue and sell shares

- borrow from banks or issue bonds

2. Why do many companies issue their own bonds rather than borrow from the banks? What does it mean for banks?

2. Bonds: general characteristics

   1. Definition

   2. Types of investors. Who buys bonds?

      • individuals

      • pension funds

      • mutual funds

      • buy-and-hold investors

   3. Investment grade.

      • What is an investment grade?

      • What is it given by?

      • Why is high rating essential for companies?

   4. How bonds work.

      • face elements of bonds

      • qualities of bonds

      • characteristics of bonds

      • advantage of a bond as a bearer certificate

      • In what way is the price of a bond related to the level of interest rates in the economy? What causes bonds to appreciate and depreciate in price? (price appreciation and price depreciation, above and below par).

   5. The reasons for governments to issue bonds.

What is the way for government to regulate money supply?

Bonds vs. bills

3. Bonds vs. shares

1. The main differences between bonds and shares in terms of income and repaymenr?

2. What types of investments carry very low, moderate, and higher risk?

3. Definitions of debt and equity financing.

4. What are advantages and disadvantages of debt and equity financing?

5. Why do companies use debt-equity ratio in financing (a mixture of debt and equity financing)?

4. (Classification of securities ).Classification of bonds.

5. Trading in bond market. Classification of global bond market.

6. Сlassification of markets including the classification of financial markets.

_Bonds

EXERCISE 1

Match the responses on the right

1. So what exactly are bonds?

2. And how do they work?

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

4. Why should that happen?

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

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

7. How's that?

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

9. And what about gilts?

10. Not Treasury Bills?

11. And James Bond?

with the questions on the left:

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%.

b. Exactly. And the opposite, a bond whose market value is higher than its face value, is above par.

с I knew you'd finish by saying that!

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.

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.

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.

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.

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

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.

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.

k. Yes. Bond-issuing companies are given an investment grade by private ratings companies such as Standard 6k Poors, according to their financial situation and performance.

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EXERCISE 2

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

BONDS

Definition of Bonds

Bond means the marketable security issued by bonds issuer following the legal procedure which needs to be repaid in contracted term including principal and interests. The bonds include: treasury, enterprise bonds sold by entrusted bonds companies and all kinds of current national debt without registration.

Face Elements of Bonds

As a certificate of certifying debt relationship, the bonds are reflected by note face of certain format. Generally, there are four basic elements on the note face of bonds

• Face Value: money type and money value

• Tender Term: from the issuing date to the date of paying off principal and interest

• Interest Rate: ratio between security interest and face value, the annual interest rate is generally expressed by hundred percentages

• Issuer Name: Main body of debtor.

Qualities of Bonds

1. . Bonds belong to marketable securities.

2. . Bonds are a kind of fictitious capital.

3. . Bonds are expression of creditor's right

Characteristics of Bonds

1. . Repaying— The bonds have a definite repaying term, the debtor must pay back the principal and interest when the term is due.

2. . Liquidity— The bondholders are flexible to transfer bonds for getting cash based on their needs and the market change.

3. . Safety— The benefit of bondholders is relatively fixed, not changing with the profit change of bonds’ issuers. The bondholder can reclaim the principal when the term is expired.

4. . Benefit— Bonds can bring certain income for investors.

Classification of Bonds

1. According to the nature of the issuer

By issuers, the bonds can be classified into government bonds, finance bonds and company bonds.

Government bonds are issued by governments

Finance bonds are issued by banks or other non-bank financial institutions.

Company bonds are issued by shareholding companies. Some countries also allow the non-shareholding companies to issue bonds.