Examples of corporate bonds in the following topics:
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- A corporate bond is issued by a corporation seeking to raise money in order to expand its business.
- A corporate bond is issued by a corporation seeking to raise money in order to expand the business.
- Strictly speaking, however, the term only applies to bonds issued by corporations .
- Corporate bonds are often listed on major exchanges (and known as listed bonds) and ECNs, and the coupon (i.e., the interest payment) is usually taxable.
- A corporate bond is issued by a corporation seeking to raise money in order to expand its business.
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- On the other hand, corporate bonds are not as liquid and not as widely traded, so investors have more difficulties in buying and selling them.
- We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
- However, investors reduce their purchases of corporate bonds because they are less liquid, decreasing the demand function and shifting it leftward.
- Thus, the government bond prices rise, which reduces the interest rate for government bonds.
- On the other hand, the corporate bond prices decrease, raising the market interest rate for corporate bond.
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- We draw the supply and demand for two markets: government bond market and corporate bond market.
- Some investors demand fewer corporate bonds and invest more in government bonds.
- Thus, the demand for corporate bonds falls while the demand for government bonds rise because the investors consider the government bonds default-free.
- Did you notice the government bonds have a higher bond price while corporate bonds have a lower bond price?
- Taking the difference between the government bond and corporate bond interest rates, we can calculate the risk premium.
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- Market interest rate currently is 4% a year, or 2% for a payment period.If the market interest rate drops to 4%, the corporation would not sell this bond at face value because the corporation would pay a higher interest rate than the market.Consequently, the corporation can sell this bond for a greater price, reflecting the market interest rate.
- We calculate the bond market price in Equation 3, and it, PV0, equals $1,076.15.Therefore, a corporation pays 4%interest on bonds with an 8% interest coupon rate.
- Registered Bonds: Corporation registers the names and addresses of the bondholders.Most corporations register bonds because the registration protects the investors from loss or theft of the bonds.
- Debenture Bonds are unsecured bonds.Thus, the corporation does not pledge assets for the bond issues.A corporation must be financially strong to issue these bonds because these bonds rely on the corporation's credit standing.
- Convertible Bonds: Bondholders have the right to exchange the corporate bonds into corporate stock on a specified date.
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- This chapter provides an overview of stocks and bonds, and the methods financial analysts use to calculate the market price using the present value formula.Furthermore, corporations issue a variety of bonds and stocks, and use them to expand business operations.Corporations sell their bonds to investors who buy these bonds and stock for investment.They either hold the bonds until maturity or sell the bonds and stock for a capital gain or loss.Consequently, investors must know the difference between yield to maturity and the rate of return.This chapterexpands on Chapter 6, and we expand the present value formula to value a variety of bonds and stocks.
- Corporations often borrow money by issuing bonds.A bond is similar to notes payable because they are written promises to pay interest and principal.We show a picture of a bond in Figure 1.Face value of this bond equals $1,000, and this bond matures on February 1, 2020.Consequently, whoever holds this bond will receive $1,000 on this date, and the bondholder also earns $100 ( 0.1 × $1,000) per year in interest.Most bonds pay interest twice annually or $50 every six months for this example.
- Bonds, however, differ from notes payable.A notes payable is a loan from a single creditor such as a bank, while a bond is a loan that corporations issue in denominations of $1,000, $2,000, etc.Finally, bonds are standardized, and thus, investors can purchase them.Moreover, investors can buy and sell these bonds on the financial markets before the bonds mature.
- A corporation needing long-term funds may consider issuing additional shares of stock or issuing new bonds.However, if the corporation issues new stock, then the existing stockholders share control with new stockholders.Consequently, the stockholders lose part of control of the corporation.On the other hand, the bondholders do not share in the management or earnings of the corporation.Although the corporation must pay the bond interest, whether it earns profits or losses, bonds reduce net income, thus lowering a corporation's taxes.U.S. corporations pay between 15 and 35% of their net income in taxes.Nevertheless, bond interest payments are an expense, which lowers the corporation's net income.If a corporation issues new bonds, then the common stockholders could increase their dividend earnings.
- A Corporation Finance an Expansion through Bonds or Stocks
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- Information costs influence the bond prices and interest rates.
- For example, investors know both U.S. government securities and corporate bonds from large corporations well, and the securities have the lowest information costs.
- 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.
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- A bond is an instrument of indebtedness of the bond issuer to the holders.
- The main categories of bonds are corporate bonds, municipal bonds, and U.S.
- Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
- Corporate and municipal bonds are typically in the three to 10-year range.
- A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.
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- 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 convertible bond may be exchanged for shares of stock of the issuing corporation at the bondholder's option.
- Many junk bonds issued in the 1980s financed corporate restructurings.
- These allow for exchange to shares of a corporation other than the issuer.
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- The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
- Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds. "
- Bonds that are not rated as investment-grade bonds are known as high-yield bonds or more derisively as junk bonds.
- The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered significantly higher than those associated with first-class government bonds.
- Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds
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- Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
- Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
- Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
- Exchangeable bonds allows for exchange to shares of a corporation other than the issuer.
- Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.