Bonds

MK, Unit 16

Sources of finance

Internal

Internally generated cashflows, e.g., retained profit

External

Equity financing Issuing shares

Debt financing Loans (from banks,

other sources) Issuing bonds

External sources of finance: equity financing

share capital, dividends shareholders

company

External sources of finance: equity financing

share capital, dividends shareholders

company

Share capital dividends

External sources of finance: debt financing

repayments and interests, loans, investment capital, principal and coupon

bondholders

company

lenders

External sources of finance: debt financing

bondholders

investment capital principal and coupon

company

loans repayments and interests

lenders

Stocks / shares

MK, Unit 17

Recall from last semester

What are incorporated / unincorporated companies?

What is unlimited/limited liability? What are limited companies? What is the main difference between private and

public limited companies? What is an IPO? Where are shares sold and bought?

MK, p. 87, Reading

1. Match up the sentences

2. Find definitions for the following terms: stocks or shares underwrite the stock issue nominal value market value stock index bull market bear market going public

Do some research!

Share price index (pl. indices) (find examples!) E.g., S&P 500, FTSE, CROBEX

Rate of return Ordinary shares Preferred shares

Match up the related terms. Decide if they are synonymous (=) or antonymous (↔) related (~) IPO equities nominal value bull market

face value flotation bear market ordinary shares Initial Public Offering market value preferred shares

Match up the related terms. Decide if they are synonymous (=) or antonymous (↔) related (~)

IPO

equities

nominal value

bull market

Initial Public Offering = flotation = preferred shares ~ ordinary shares ~ face value = market value ↔ bear market ↔

Primary or secondary market?

The market in which investors or speculators have the first opportunity to buy a newly issued security.

A market on which an investor or speculators purchases an asset from another investor rather than an issuing corporation.

Market trends

Bull or bear?

1. A rising market 2. A speculator who expects prices to rise and

purchases a security or commodity in hopes of reselling it later for a profit.

3. A declining market 4. A speculator who expects prices to decline

and sells a (borrowed) security or commodity in the hope of buying it back later at a lower price.

Bull or bear?

1. A rising market – a bull market2. A speculator who expects prices to rise and

purchase a security or commodity in hopes of reselling it later for a profit. - bulls

3. A declining market – a bear market4. A speculator who expects prices to decline

and sell a (borrowed) security or commodity in the hope of buying it back later at a lower price. – bears

Divide the words into 2 groups

Markets can be … booming, bear, bull, depressed, falling, rising,

strong, weak

A booming, bull, rising, strong market A bear, depressed, falling, weak market

Bonds

Reading comprehension

1. Who are the different actors in issuing and selling bonds?

2. Why would somebody buy a bond?3. What are the advantages of buying bonds over

shares?4. What are the disadvantages?5. What are the advantages and disadvantages of

debt financing for companies (selling bonds over selling shares)? Use the term “tax deductible”.

6. Where can bonds be bought?7. What affects bond prices?

Government bonds

1. What are government bonds called?

2. Why do governments issue bonds?

3. What is another reason for issuing government bonds, not mentioned in the text?

Tasks

MK, p. 82, Vocabulary 1 MK, p. 82, Comprehension

Vocabulary: Talkking about bond value

Par = nominal or face value (100%) Above par Below par

100% 110% 60%

The bond is sold at par. The bond is sold at above par. The bond is sold at below par.

MK, p. 82, Vocabulary 2

Borrow Deduct Deduct Finance Issue Issue Pay Pay Pay Pay Raise

money interest payments tax activities shares bonds (a rate of) interest a (higher) return dividends tax money

MK, p. 82, Vocabulary 2

Receive Receive Repay Repay Repay Sell Sell

interest payments dividends principal bonds money assets bonds

Bonds (Reading: MK, p. 84, Questions: p. 83)

Question 1:

a) UK government bonds,

b) corporate bonds, c) high-yield bonds

Types of bondsMatch up the terms that mean the same

UK government bonds

corporate bonds

high-yield bonds

non-investment grade bonds

investment grade bonds

gilts

junk bonds

Solution: Types of bondsMatch up the terms that mean the same

UK government bonds

corporate bonds

high-yield bonds

Why do junk bonds offer a high yield?

Find a definition in the text.

gilts

investment grade bonds

junk bonds

non-investment grade bonds

Bonds (Reading: MK, p. 84, Questions: p. 83)

Question 2: how do these sentences answer the question?

UK government bonds soared [ … ] after the Bank of England unveiled plans to buy billions of pounds of assets [ … ].

With the economy speeding downwards, companies that were once thought ultra-safe are now being forced to offer higher returns to investors.

[High-yield bonds have] started to grow in popularity, partly dues to the staggeringly high-yields they have offered since the world plunged into recession…

Bonds and shares compared

Reader

Answer these questionsReader, p. 37

1. How can corporations finance their activities? (3)

2. What are the rights of a shareholder?

3. List the main differences between stocks and bonds.

4. What does “legally prior claim” mean?

5. List 3 types of risks that affect the value of bonds.

Finish the sentences

1. Bonds are liquid, i.e.  

2. Bonds usually have a defined term, or maturity, after which ...

3. If a company goes bankrupt, its bondholders will often

4. If a company goes bankrupt, the shareholders often

they are easy to sell.

the principal is repaid.

receive some money back.

lose all their investment.

Shares or bonds?

Put these terms into two groups:

Ownership share, value affected by changes in interest rates, legally prior claim upon profits, paid back, never paid back, dividend, influence on the running of the company, loan, coupon, more/ less risky investment, market value varies, liquid, maturity, outstanding indefinitely, value affected by inflation, tax shield

Shares Ownership share Dividend Influence on the

running of the company More risky investment Market value varies Never paid back =

Outstanding indefinitely Liquid

Bonds Loan Coupon Legally prior claim upon

profits Less risky investment Market value varies Paid back on maturity Liquid Value affected by

inflation and changes in interest rates

Tax shield

Practise: Write sentences with these terms:

1. Raise money, shares, bonds

2. Insurance companies, mutual funds, pension funds, institutional investors, bonds

3. Principal, maturity date

4. Coupon, regular, fixed

5. Bondholders, creditors, lend

Practise: Match up the synonyms

Equity financing Debt financing Treasury bonds/notes Primary market Secondary market The principal The coupon

Issuing bonds The original investment shares/ bonds sold by the

issuer Issuing shares Shares/bonds sold by

investors Gilt-edged stock/ gilts Interest payment on a

bond

Solution

Equity financing Debt financing Treasury bonds/notes Primary market

Secondary market

The principal The coupon

issuing shares issuing bonds gilt-edged stock/ gilts shares/ bonds sold by the

issuer shares/bonds sold by

investors the original investment interest payment on a bond

HW

p. 92 Match up the half-sentences