section 19.1 corporate bonds mrs. a what you’ll learn identify the characteristics of corporate...
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Section 19.1Corporate Bonds
Mrs. A
What You’ll Learn Identify the characteristics of corporate bonds
Explain the reasons corporate bonds are bought and sold
Corporate BondsCorporate Bonds
Why It’s Important
•More choices to consider when investing
The face of a corporate bond states:
Characteristics of Corporate Bonds
Corporate BondsCorporate Bonds
Interest rate (coupon rate)
Maturity date
Face value (Par value) of the bond
Go Figure. . . A Bond’s Annual Interest Income
Corporate BondsCorporate Bonds
8.5% 100 = .085
The amount of money you earn from interest on a bond.
Borrow money for major purchases
Raise money when it is difficult to sell stock
To finance regular business activities
To reduce the amount of tax a corporation must pay
Why Corporations Sell Corporate Bonds
Corporate BondsCorporate Bonds
DebentureDebenture— Backed only by the reputation of the issuing corporation rather than by its specific assets.
Mortgage bondMortgage bond (or secured bond)— a bond that is backed by assets of the corporation.
Types of Corporate Bonds (1 of 2)
Corporate BondsCorporate Bonds
Convertible bondConvertible bond— a bond that an investor can trade for shares of the corporation’s common stock.
Subordinated debentureSubordinated debenture— an unsecured bond that gives bondholders claim to interest payments and assets of the corporation only after all other bondholders have been paid.
Types of Corporate Bonds (2 of 2)
Corporate BondsCorporate Bonds
A call featurecall feature allows a corporation to buy back bonds from bondholders before the maturity dates.
A sinking fundsinking fund is a fund to which a corporation makes deposits for the purpose of paying back a bond issue.
Serial bondsSerial bonds allow a corporation to repay bond issues over several years because these bonds are issued at the same time but mature on different dates.
Methods Corporations Use to Repay Bonds
Corporate BondsCorporate Bonds
Safe investments
Diversify portfolios
Increase in value depending on the bond market
The face value of the bond is repaid when it reaches maturity
Interest income $$$$$
Why Investors Buy Corporate BondsCorporate BondsCorporate Bonds
Different Ways to Get Interest Income
Corporate BondsCorporate Bonds
Bond with coupons attached
Coupon for a Bond
NO Interest Income
Corporate BondsCorporate Bonds
Zero-coupon bondZero-coupon bond—a bond that provides no interest payments. It is sold at price far below its face value and redeemed at maturity for face value.
Go Figure . . . A Bond’s Market Value
The value of a bond and the interest rate of new bonds issued in the market have an inverse relationship.
Corporate BondsCorporate Bonds
Interest Rate Bond Value
Interest Rate Bond Value
You have a bond that has a coupon value of 6%, par value of $5000. New bonds are being issued at 8%.
1. Will your bond increase or decrease in value?
2. How much is your bond worth?
$5000 X .06 = $300 annual interest incomePar Value X coupon value = annual interest income
$300/.08 = $3750
Annual interest income/new coupon value =
Value of the bond
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