Financial Management 2
K. V. Mendoza, MBA
Bonds and Their
Characteristics
Bonds and Their Key
Characteristics
What is Bond?
Who Issue Bonds?
Key Characteristics of
Bonds
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.
Who Issue Bonds?
Corporation
s
Government Agencies
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:
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.
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.
Classification of Bonds
Treasury Bonds-generally
called Treasuries and
sometimes referred to as
government bonds, are
issued by the government.
Classification of Bonds
Corporate Bonds-are
issued by business firms.
unlike Treasuries,
corporates’ are exposed to
default risk.
Classification of Bonds
Municipal Bonds-or munis,
is the term given to bonds
issued by state and local
governments.
Classification of Bonds
Foreign Bonds-are
issued by a foreign
government or a foreign
corporation.
Key Characteristics of Bonds
Par value- is the stated face value of the bond
Key Characteristics of Bonds
Coupon Payment- is the specified number of dollars of interest paid each year.
Key Characteristics of Bonds
Coupon
Interest
Payment- the
stated annual
interest rate
on a bond.
Key Characteristics of Bonds
Fixed Rate
Bond- a
bond whose
interest rate
is fixed for
its entire life
Key Characteristics of Bonds
Floating Rate
Bond- A bond
whose interest
rate fluctuates
with shifts in the
general level of
interest rates.
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
Key Characteristics of Bonds
Maturity
Date- a
specified date
on which the
par value of a
bond must be
repaid
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.
Call Premium = $ 100
@10Year Bond, 10%
annual coupon
Par Value = $ 1,000
Payment = $ 1,100
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
Key Characteristics of Bonds
Convertible
Bond- bond that is
exchangeable at the
option of the holder for
the issuing firm’s
common stock
Key Characteristics of Bonds
Warrant- a long-
term option to buy a
stated number of
shares of common
stock at a specified
price
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.
Key Characteristics of Bonds
Income Bond
– a bond that pays
interest only if it is
earned
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
Just as the rich rule the poor, so the
borrower is servant to the lender.
Proverbs 22:7
end of lecture
Top Related