Chapter 5, Bonds Flashcards
(17 cards)
What is a more formal definition of bonds?
A debt instrument whereby an investor lends money to an entity
What are the two main issuers of bonds?
Companies and government
What are bonds issued by companies called?
Corporate bonds
What are bond repayment dates dependent on?
- Financial plans of the issuing company
- Periods over which investors may wish to invest
What are some main countries that issue government bonds?
- Germany
- USA
- France
- UK
What features do bonds have?
- Repayment date
- Frequency which interest needs to be paid
- Coupon
- Nominal value
Are bonds trade-able?
Yes
What is nominal value?
Amount that is owed by the bond issuer that will be repaid on repayment date
What is redemption date?
Repayment date/ maturity date
What is bond yield?
Another word for return - expressed as annual percentage
What type of relationship is there with bond price and yield?
Inverse relationship between bond price and yield - increase in yield, decrease in bond price
What are advantages of investing in bonds?
- Predictable income in the form of regular, fixed coupons
- Fixed date and amount to be repaid
What are disadvantages of investing in bonds?
- Actual default - the failure of the issuer to be able to pay the coupons and/or redemption amount
- An increased risk of default resulting in a fall in the bond’s value
What are the three credit rating agencies?
- Moody’s
- Standard and Poor’s
- Fitch Ratings
What choices do companies have when it raises finances?
- Raise money by borrowing (bonds or bank loans)
- Raise money by selling more equity
What is leverage?
The proportion of debt finance compared to equity finance in a company
What impacts how much borrowing a company has?
- How much lenders are willing to lend and how much they charge
- The fact that if the company doesn’t perform well, a larger proportion of borrowing will have the opposite effect on equity value
