Examples of bond funds in the following topics:
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- Most individuals purchase bonds via a broker or through bond funds.
- Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
- Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
- An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
- Most bond funds pay out dividends more frequently than individual bonds.
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- The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
- The firm can only repurchase a limited fraction of the bond issue at the sinking fund price.
- Thus the balance sheet consists of Asset = Sinking fund, Liability = Bonds
- One purpose of a sinking fund is to repurchase outstanding bonds.
- Describe how a sinking fund operates in regards to a bond issue
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- In the previous supply-demand graphs, the bond was the good for the market.
- Consequently, the bond and loanable funds markets yield identical results because we examine the same picture in a different manner.
- If investors buy bonds, then they have a demand for bonds.
- Investors become a source of loanable funds because they trade money for bonds.
- If a businesses or governments sell bonds, then they demand loanable funds.
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- Loanable funds and bond market are opposites of each other.
- Loanable funds indicate the direction the money flows while the bond is the good.
- If investors buy a bond, they are supplying money, i.e. loanable funds.
- If a business issues bonds, then it demands money, i.e. loanable funds.
- Thus, investors would loan their surplus funds abroad to earn the greater interest rate.
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- In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
- Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
- Insurance companies and pension funds have liabilities, which essentially include fixed amounts payable on predetermined dates.
- Most individuals who want to own bonds do so through bond funds.
- There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
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- In the loanable funds market, market clearing is defined as the interest rate/loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments) .
- For instance, buying bonds will transfer savers' money to the institution issuing the bond, which can be a firm or government.
- In return, the borrower's (institution issuing the bond) demand for loanable funds is satisfied when the institution receives cash in exchange for the bond.
- Loanable funds are often used to invest in new capital goods.
- When the supply and demand for loanable funds are equal, savings is equal to investment and the loanable funds market is in equilibrium at the prevailing interest rate.
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- The most common secured bonds.
- This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
- A term bond matures on the same date as all other bonds in a given bond issue.
- Serial bonds in a given bond issue have maturities spread over several dates.
- A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock.
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- The journal entry to record the retirement of a bond: Debit Bonds Payable & Credit Cash.
- A maturity date is the date when the bond issuer must pay off the bond.
- Some structured bonds can have a redemption amount that is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund.
- Bonds can be classified to coupon bonds and zero coupon bonds.
- A description of bonds issued including the effective interest rate, maturity date, terms, and sinking fund requirements are included in the notes to financial statements.
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- Information costs influence the bond prices and interest rates.
- On the other hand, the information costs for new and small companies are high, and therefore, these companies paygreater interest rates when they borrow funds.
- We depict the bond markets in Figure 3.
- High information cost bonds are not as attractive as an investment, so investors buy fewer bonds, reducing bond prices and raising interest rates.
- Therefore, low-information-cost bonds pay a lower interest rate.