Text 2. Bonds

1.  Read the text and state the logical connection with Text 1.

2.  Find and translate ing- forms.

3.  Translate the text and speak on the main advantage of bonds.

In addition to the various classes of ownership, some corporations borrow money for long periods by issuing bonds. Bondholders are not owners, but creditors of the firm. Bonds are corporate IOUs that promise to pay a specified annual rate of interest and to repay the borrowed principal on a specified date. Bond interest and principal are contractual claims against the firm and must be paid whether the firm makes profits or not. If payments are not made on time, the bondholders can sue the firm to collect.

The use of bonds makes it possible for a firm to borrow large amounts of money from a number of small creditors by breaking up the debt into small units, just the way issuing stock breaks up the ownership equity. Certain kinds of firms, most notably public utilities, raise more of their capital by bonds than by stocks.

Exercises

1. Find the English equivalents in the text:

занимать деньги, выпускать облигации, собственник, ежегодная процентная ставка, возместить капитал, иск фирме, извлекать прибыль, делать платежи, доля собственности.

2. Match the words from list A with their synonyms from list B:

A. class, specified, annual, to repay, principal, interest, profit, to break up, to issue, to raise, notably, debts.

B. per cent, stock, to recover, yearly, certain, kind, income, arrears, specially, to increase, to produce, to divide.

3. Give derivatives of the following words and translate them:

to add, bond, to utilize, principal, unit, issue, public.

4. Give possible translations of the words:

bond, rate, interest, principal, unit, issue, public.

5. Write definitions for the following notions:

to borrow money, bonds, to issue bonds, bondholder, annual rate of interest, to repay the principal, contractual claims, ownership equity, to make profit.

6. Answer the questions:

1. What is the status of bondholders?

2. What is the value of bonds?

3. Why is the issue of bonds profitable for a firm?

4. What kind of firms widely use bonds?

7. Render into English:

Некоторые корпорации выпускают облигации и продают их населению. Держатели облигаций являются кредиторами фирмы. Облигация гарантирует своему владельцу ежегодные проценты и возврат взятого взаймы капитала в определенный срок. Облигации позволяют фирмам пользоваться займами многих мелких кредиторов. К таким фирмам относится большинство коммунальных учреждений.

Text 3. Leverage

Translate Text 3 in written.

When part of a firm’s capital is raised through preferred stock and bonds, fluctuation in total earnings have a magnifying effect on the income of common stockholders. This phenomenon, called leverage, arises because preferred stock and bonds are fixed income securities.

Leverage is best illustrated by an example. Suppose a corporation’s ownership equity of $ 10 million consists entirely of 100,000 shares of common stock. Since there are no fixed income securities, earnings per common share vary exactly in proportion to total earnings. Total earnings of $ 500,000 would be $ 5 per share. If total earnings doubled to $ 1 million, earnings per common share would likewise double to $ 10. If earnings shrank 80 percent from $ 500,000 to $ 100,000, earnings per common share would likewise decline 80 percent from $ 5 to $ 1.

Now suppose that the same corporate ownership consists of $ 5 million of 5-percent preferred stock and $ 5 million divided into 50,000 shares of common stock. Regardless of total earnings, the preferred stock is entitled to dividends of 0,5 - $ 5 million, or $ 250,000.

This fixed income gives leverage to the common stock. Thus, when total earnings are $ 500,000, preferred stockholder receive $ 250,000, leaving $ 250,000, or $ 5 per share of common stock, just like before.

But when total earnings double to $ 1 million, the leverage provided by the fixed income securities triples the earnings per common stock share. Preferred stockholders still get only their $ 250,000, leaving earnings of $ 750,000, or $ 15 per share, to the common stock.

Unfortunately, leverage also works when earnings decline. Should total earnings fall to $ 100,000, preferred stockholders would still be entitled to their fixed $ 250,000. This would leave common stockholders a loss of $ 150,000, or $ 3 per share, despite the positive total earnings made by the company.