• What are the two main ways established companies can raise money?
Securities
• Securities*:- Stocks – equity financing- Bonds – debt financing- money market instruments:
• (derivatives, futures, options)
- * vrijednosnice, vrijednosni papiri
BONDS
MK, U 16 (p 81)
Bonds• What is a bond?
• Who buys / sells / issues bonds?
• Why do they do it?
Introduction to Bonds (video) http://www.investopedia.com/video/play/understanding-bonds
• Definition of bonds?• Term used for the price of a bond on the primary
market? • Maturities mentioned?• Coupons mentioned?• Why do corporations/governments issue bonds?• What is important to remember about bonds?
What is a bond?• A d____ instrument issued by governments,
corporations and other entities in order to finance projects or activities. A l____ that investors make to the bond’s i______.
Term used for the price of a bond on primary market?
• F____ value. What is the face value of a bond?• The amount l_____ to the issuer.What does the investor receive in exchange for
the loan?• Interest, known as c______.
ebt
oanssuers
ent
oupon
ace
What is maturity?• The time when a financial instrument (such as
a bond or an insurance policy) becomes ready to be p_____. Bonds are issued for a specified period of time.
Maturities mentioned?• 1 year, 3 years or 30 yearsCoupons menioned?• 8%Why do corporations/govts. issue bonds?• To fund capital projects / public projects
aid
What is important to remember about bonds?
• The higher the interest rate, the more/less risk it is likely to carry.
• The higher the interest rate, the more risk it is likely to carry.
Debt Finance vs. Equity Finance
• Reading: BONDS (MK, p.81)
Read the text and underline:
• Two main ways governments can raise money?
• Two main ways established companies can raise money?
Debt Finance vs. Equity Finance(MK, p.81)
BONDS FOR INVESTORS FOR ISSUERS
ADVANTAGE
DISADVANTAGE
generally safer
shares pay a higher return
bond interest is tax deductibleWHAT DOES IT MEAN?
debt increases a company’s financial riskHOW?
More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?
• Who are market makers?
• Bid vs. offer price?
• What is a spread?
• What is inversely related?
• What does the yield of a bond depend on?
More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)dged
SECURITIES* (part II): BONDS (U16) DEBT FINANCINGDEBT FINANCING ( = ( = loans)
Risk rating: AAA (best) to C (worst)
Companies:
BONDSan interest paying
loan
which can be traded
on bond markets
securities, papers
* vrijednosnice
Governments:
LONG-TERM BONDS:
GILTS – GB
TREASURY BONDS-USA
TREASURY NOTES-USA
SHORT-TERM BONDS:
TREASURY BILLS (3-MONTH)
More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)• Who are market makers?Banks & b________ companies which q____ bid and offer price.• Bid vs. offer price?_____ – the highest price that the buyer is willing to pay
_____ – the price asked by sellers• What is a spread?D________ between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?I_____ r____ in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?I______ given by a bond. It depends on its c______ and its
purchase price.
dged
rokerage uote
Bid
Offer
ifference
nterest ate
ncome oupon
More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-edged stock (UK)• Who are market makers?Banks & brokerage companies which quote bid and offer price.• Bid vs. offer price?Bid – the highest price that the buyer is willing to payOffer – the price asked by sellers• What is a spread?Difference between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?Interest rates in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?Income given by a bond. It depends on its coupon and its
purchase price.
Comprehension, MK p 82
1 F
2 T
3 T
4 F
5 T
6 F
7 F
8 F
Vocabulary, MK p 82
1 cash flow 2 equity
3 mutual funds 4 pension funds
5 principal 6 maturity
7 coupon 8 insolvent or bankrupt
9 creditors 10 dividends
11 market makers 12 bid / bid price
13 offer / offer price 14 yield
Match up verbs with nouns, 82
HW:The Financing of Corporate Activity, RB p77Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
Do exercises I, II & III
IV Read and match headings with paragraphs
The Financing of Corporate ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.
Features of well-organized writing:
1. Text headings
2. Topic sentences
3. Paragraphing
4. Connectors
HW:
V RB, p 79 – Make notes on the text using the table on p 79
E.g. notes:
CORPORATE FINANCE• Full text: Generally speaking, ...... three
different ways... First, ..., Second, ..., For example, ...Third,...
• Notes:
THREE WAYS OF CORPORATE FINANCE: 1.2. .... (e.g. ... )3.