- How do borrowers raise money for investment?
What are bonds?
Loans, IOU, represents debt.
How do bonds pay out to the investor?
Fixed amount of interest at regular intervals.
Are they high or low risk in general?
What are the three components of bonds? Explain each.
A. Coupon Rate – Interest issue will pay.
B. Maturity – Time bond is clue.
C. Par Value = Amount investors pay for the bond.
How much would the $1,000 investment receive at maturity or the end of the 10 years?
What is Yield?
Annual rate of return.
What is buying bonds at discount?
Bond is less desirable and earns less interest. Less than per value.
Why would someone sell bonds at discount?
They need the money.
What two organizations rate bonds?
Standard and Poor and Moodys.
What is their rating scale and what does it mean?
Standard AAA-D, Moddy’s AAA-D.
What does a higher rating mean for its interest rate it has to pay?
A lower interest rate.
What makes bonds desirable from the issuer’s point of view?
A. Fixed payments – Interest rate stays the same.
B. Bond holders do not hold stock in their company.
What are two disadvantages to the issuer?
A. Fixed Interest – Payments have to be made even in bad years.
B. Bond may be burned on the rating scale if they have financial problems and will have to pay taxes.
What is a savings bond?
A. Denominations – $50 – $10,000
B. Issued by the US government.
C. Help pay for public works.
D. Risk is low.
E. Interest payments – None, matures at the end.
F. Purchase Price – $50 bond sells for $25.
What is a treasury bond?
A. Issued by the U.S. treasury.
B. Called the T-Bill and T-Notes.
C. Risk is very low.
D. Denominations – $1,000
E. Maturity – 3 months to 30 years.
What is a Municipal Bond?
A. Issued by the local government.
B. Pay for highways, public schools, libraries, buildings.
C. Risk is safe.
D. Called “Munis”.
E. Tax – Tax exempt.
What are Corporate Bonds?
A. Issued by corporations
B. Pay for business expansion.
C. Denominations – $1,000 – $5,000, $10,000.
D. Risk is moderate (depends on the business).
E. Watched by securities and exchange commission.
What are Junk Bonds?
A. Ratings are low.
B. Risk is high.
C. Ratings are usually BB, BA, or lower.
D. Issued by companies (smaller).
What is a Capital Market?
Money lent out for longer than a year.
What is a Money Market?
Money let out less than a year.
What are Primary Markets?
Assets can only be released by original holders and sold on the primary market.
What are Second Markets?
Assets sold and resold on the stock market.