...A. The first key feature of a bond is Par or face value which is generally assumed at $1,000 par value, but par can be anything and often $5,000 or more is used. Whatever amount you purchase a bond for that is the amount on the certificate. The second key feature is the coupon rate the dollar coupon is the “rent” on the money borrowed which is generally the par value of the bond. The coupon rate is the annual interest payment divided by the par value, and it is generally set at the value of r on the day the bond is issued. The third key feature is maturity this is the number of years until the bond matures and the issuer must repay the loan (return on par value). The fourth key feature is the issue date, this is the date the bonds were issued. Finally the fifth key feature is default risk, this is a risk that every bond except treasury bonds have that the issuer cannot pay the money that is promised. B. A call provision is a provision in a bond contract that gives the issuing corporation the right to redeem the bonds under specified terms prior to the normal maturity date. Which means that if the corporation calls in a bond sooner than the maturity date that they are paid a greater amount than the par value. There is also a call premium that must be paid if called in sooner and that means the amount is equal to one year’s interest the first year and then the amount is reduced after that year is called in later. A sinking fund provision is a bond contract that requires the...
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...Information about Bonds Here is some terminology to remember: Bond: Long term debt instruments issued by corporations or governments Face Value (or par value or maturity value): The promised repayment at the end of the loan Coupon: The regular interest payments promised by the bond issuer Coupon Rate: Annual coupon payment divided by the face value Time to maturity: Number of years remaining to the face value payment (notice that ‘time to maturity’ for a bond decreases as time passes since the maturity date is a fixed, pre-determined date) Yield to Maturity (or required return or market rate): The rate of return that is required by the market for the bond at hand. Don’t be surprised to observe that the Yield to Maturity (YTM) may differ from the Coupon Rate in many occasions. This happens since coupon rate is fixed over the term of the bond, but YTM is a dynamic figure that is shaped by factors relating to the bond issuer and/or the general economy (e.g. interest rate movements in the economy or changes in the default-risk of the issuer). More formally, a bond is evidence of debt issued by a corporation or a governmental body. A bond represents a loan made by investors to the issuer. In return for his/her money, the investor (or bondholder or lender) receives a legal claim on future cash flows of the borrower. The issuer promises to: - Make regular coupon payments every period until the bond matures, and - Pay the face/par/maturity value of the bond when it matures...
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...BONDS: TYPES, RISKS, AND BENEFITS When a corporation wants to borrow money from the public on a long-term basis, it does so by selling securities that are called bonds. There are different types of bonds available, each with different risks and rewards. The different factors associated with each type of bond, determines how it fits into your portfolio. A bond is an interest-only loan, where the borrower will pay the interest every period, and then repay the principal amount at the end of the loan. The value of bonds fluctuates. When the interest rate increases, the bond becomes worth less. When interest rates fall, the bond becomes worth more. A bonds value at a particular point in time, known as its yield to maturity, can be calculated by using information such as: the number of periods to maturity, the face value, the coupon or stated interest payment made on a bond, and the market interest rate for bonds with similar features. With this information we can calculate the bonds yield to maturity (YTM) or “Yield” for short. The US government is the biggest borrower in the world. In early 2009, the total debt of the US Government was approaching $11 Trillion Dollars. When the government wants to borrow money for more than one year, it sells Treasury Notes/Bonds to the public. Most US treasury bonds are just ordinary coupon bonds. Some older issues are callable meaning the government can repurchase the bond at specific price prior to maturity. Treasury issues have...
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...used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.[1] Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements. Attributes • A movable property. • Issued by the company in the form of a certificate of indebtedness. • It generally specifies the date of redemption, repayment of principal and interest on specified dates. • May or may not create a charge on the assets of the company.[2] • Corporations often issue bonds of around $1000, while government bonds are more likely to be $5000. Debentures gave rise to the idea of the rich "clipping their coupons," which means that a bondholder will present their "coupon" to the bank and receive a payment each quarter (or in whatever period is specified in the agreement). There are also other features that minimize risk, such as...
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...A typical halogen bond is denoted by the three dots in R–X…Y. R–X is the halogen bond donor, X is any halogen atom with an electrophilic (electron-poor) region, and R is a group covalently bound to X. In some cases, X may be covalently bound to more than one group. It may also form more than one halogen bond. Y is the halogen bond acceptor and is typically a molecular entity possessing at least one nucleophilic (electronrich) region.[2,4, 48] 1.3 List of Features (as proposed by the IUPAC)* Existence of a halogen bond may be evident by experimental or theoretical, or even both. Some features that are useful as signs for the halogen bond are mentioned below. The more the number of features met, the more consistent the description of an interaction as a halogen bond is. [4] In a typical halogen-bonded complex R–X…Y: • The interatomic distance between X and the appropriate nucleophilic atom of Y tends to be less than the sum of the van der Waals radii. • The length of the R–X covalent bond usually increases relative to the unbonded...
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...Lecture 4: Bond Market and Bond Valuation GMBA 609: Managerial Finance Dr Anthony Owusu-Ansah aowusu-ansah@gimpa.edu.gh GIMPA Business School October 2014 Dr Owusu-Ansah (GIMPA Business School) Lecture 4: Bonds October 2014 1 / 49 Learning Objectives At the end of this session, you should be able to: De…ne and understand the basic mechanisms of the bond market Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Describe the legal aspects and the features of di¤erent types of bonds. Apply the basic valuation model to bonds, and describe the impact of required return and time to maturity on bond values. Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually. Dr Owusu-Ansah (GIMPA Business School) Lecture 4: Bonds October 2014 2 / 49 Types of Loans Pure Discount Loan Interest-only Loan Amortized with Fixed Principal payment Amortized with Fixed Payment Dr Owusu-Ansah (GIMPA Business School) Lecture 4: Bonds October 2014 3 / 49 Pure Discount Loans Treasury bills are excellent examples of pure discount loans. The principal amount is repaid at some future date, without any periodic interest payments. Dr Owusu-Ansah (GIMPA Business School) Lecture 4: Bonds October 2014 4 / 49 Pure Discount Loans...con’ t Problem If a T-bill promises to repay $10,000 in 12 months and the market interest rate is 7 percent, how much...
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...some agreed time in the future. The most common debt instruments are bond, loan and private placement. Bond is a public issue of long-term debt, while loan and private placement are the private issue of long-term debt. It depends on the firm to decide which long-term debt to issue. In the case of Hill Country, I would highly recommend that the firm seeks the capital by issuing the bonds rather than bank loan. If obtaining bank loan, the interest rate and other terms of bank loan will be set by the banks. For example, Hill Country need to follow all the constraints stated in the loan covenant if they applied bank loan. The bank loan covenants usually protect the bank but impose restrictions on the borrower. It includes the positive covenant and negative covenant. The positive covenant requires the borrower to perform certain actions, whereas negative covenant makes the borrowers refrain from certain actions that could result in the deterioration of their credit standing. However, by issuing the bonds, Hill Country can actively set the interest rate and schedule the payments based on the current market conditions. Bond will be issued to the public, which means that the buyer of bond can be an individual or institutional investor. When the firm issues a bond, the investor that purchases the bond are lender that provide the firm with debt financing. One of the features of bond is the call feature. A callable bond can be redeemed by the issuer prior to its maturity period if the market’s...
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...Bond Valuation By Anuj Joshi Note 1 Bond Valuation Fixed income paying securities. 1. Theoretical price or value of bond depends upon. i. Coupon Payment : Fixed amount of interest to be received after prescribed frequency. ii. Maturity Value [Unless otherwise given is exam, we should take face value] iii. Discount Rate : It should always be market interest rate 2. What is market interest rate Market interest rate is derived from comparable listed bond. The comparison is based on risk and life of the bond. E.g. If we are valuing a bond which is unlisted and have 5 years of life, then we should look for a bond which is similar in risk profile (i.e. same credit rating)and having similar life. The YTM (Yield to Maturity) of listed bond is called market interest rate The YTM of a bond is nothing but IRR of the bond. 3. Value of a bond = PV of Coupon Amount + PV of Maturity Value [Remember CF and discount rate are before tax] Concept Point: i. Coupon rate is a historical rate and should never be used as a discount rate. In exam, if no other information is available, then only we should assume coupon rate of interest as market rate of interest. ii. Remember, Cost of Capital or Discount Rate is a future concept and it represents opportunity cost on the date of valuation. iii. YTM of a similar bond (i.e. current market interest rate) is the appropriate discount rate for bond valuation. How to value a bond which pays interest at a frequency lower than annually (e...
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...GAME SUMMARY & PARAMETERS – QUICK REFERENCE Ground rules for the simulation (Solo Assignment 1 and the Team Competition) are outlined below. Please note that several of these parameters are different from those used in your solo practice and from those described in the Micromatic student manual. All values listed here are effective as of the beginning of Quarter 1. Future values may change due to your decisions and/or changes in the competitive/market environment. Remember to take note of all changes as the competition proceeds. (1) PRODUCTION OPERATIONS AND ADMINISTRATION Production Plant and Capacity In the beginning of Quarter 1, you only own one plant in Region 1. Products assembled in this plant are stored in company warehouses located in Region 1, Region 2, and Region 3 markets. Region 3 is a European market and all transactions taking place in that region will be in Euros, unless stated otherwise. From each warehouse, products are sold in the respective market. Current plant capacity for regular production in Region 1 18,000 units per quarter Company Owned Capacity (available through Q20) 10,000 units per quarter Leased Capacity (available through Q7; has to be ordered again in Q7) 8,000 units per quarter Overtime production capacity See “Production Workforce and Wages” section below Minimum plant capacity (owned or leased). If you choose to have operations in a...
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...is most CORRECT? a. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. b. From the issuer's point of view, preferred stock is less risky than bonds. c. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. d. Unlike bonds, preferred stock cannot have a convertible feature. e. Preferred stock generally has a higher component cost of capital to the firm than does common stock. 2. Which of the following statements about convertibles is most CORRECT? a. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. b. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. c. At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. d. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. e. The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its...
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...PREFERRED STOCK, LEASING, CONVERTIBLES, WARRANTS, AND OPTIONS II IIJ Understand the basic rights of preferred stockholders, the features of preferred stock, special types of preferred stock and the advantages and d isadva ntages of preferred stock. Review the basic types of leases, leasing a rrangements, the lease contract, the lease-versus-pur chase decision, the effects of leasing on future financing , and the adva ntages and d isadvan tages of leasing. Describe the basic types of converti ble securities, their general fea tures-incl ud ing the conver sion ratio, conversion period, conversion (or stock) value, and effect on earnings-and financ ing with convertibles. • II Demonstrate the procedures for dete rmi ning the stra ig ht bond value, conversion (or stock) va lue, and market value of a convertible bond. Explain the basic characteristics of stock purchase wa rrants, the implied price of an attached warrant, and the va lues of warrants-theoretical, market, and warrant premium. Define options and discuss the basics of ca ll s a nd puts, options markets, options trading, the role of call and put options in fund raising, and using options to hedge foreign currency expo sures. the DISCIPLINES CHA PTER 14 I S I MPOR TA NT TO • u((ounting personnel who will provide important data a nd tax insights to the lease-versus-purchase decision process. • information systems analysts who will design systems that p'ro vide...
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...expected that you will attached an assignment cover sheet to each assignment you submit. Page 2 Table of Contents EXECUTIVE SUMMARY 1. INTRODUCTION 2. NATURE OF CONVERTIBLE BONDS 3. FINANCIAL ADVANTAGES AND DISADVANTAGES 3.1 3.2 ADVANTAGES DISADVANTAGES ii 1 1 2 2 2 3 5 5 6 7 4. ACCOUNTING TREATMENT 5. LOGIC OF THE ACCOUNTING REQUIREMENTS 6. CONCLUSION 7. RECOMMENDATIONS REFERENCES (i) Page 3 EXECUTIVE SUMMARY This report provides information about convertible bonds for the managers of Hamilton Manufacturing. Included is information about the nature of convertible bonds, financial advantages and disadvantages Hamilton could expect from issuing such bonds, and their accounting treatment. A convertible bond is a debt security that carries the option of exchange for an equity security, usually common stock. The bond indenture specifies when the bonds may be converted and a conversion price or ratio. The conversion price is usually from 10 to 20 percent above the market price of the common stock at the time of issue. Both the issuer and the investor expect the market price of the stock to rise above the conversion price; therefore, bondholders are likely to convert the bond into equity. Convertible bonds would offer Hamilton three advantages: ▪ The company could issue the bonds at a premium or at a low stated interest rate, which investors would accept because of the conversion privilege. ▪ The company could avoid another stock issue now, when the price...
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...warrants fell quickly from the initial deal levels Exhibit 1 daily implied volatilities of exchange-listed yen currency warrants 1988, IFR reported the first of a series of recent Eurobonds whose redemption values at maturity were tied to the level of the Nikkei 225 stock average. Exhibit 2 Representative Nikkei-Linked Euro-Yen offerings, Dec 1989 Exhibit 3 Hypothetical Nikkei-Linked Euro-Yen Transactions Through a set of swaps, the issuer transformed its annual fixed-rate yen payments in to dollar-dominated LIBOR-based payments. At maturity, the issuer would redeem the bonds from the investor a price tied to the Nikkei. If Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds. Thus, it would be as if the issuer sold bonds with final principal payments at par but also bought a put option on the Nikkei maturing in the same years as the bond. If the Nikkei fell, the put would rise in value, benefiting the issuer. Usually, the issuer had no interest holding the embedded Nikkei put. But it could resell put options to financial intermediaries like Goldman by promising to deliver, at maturity, the difference between the bond’s par value and its...
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...quiz? 100% on both 2. What questions gave you a hard time? Why? No issues 3. Identify some of the important features of bonds. Bonds have set maturity dates that range from 1 to 30 years. They typically offer some form of interest payments either by fixed rate, floating rate, or zero coupon. The bond issuers are required to repay the principle full amount in a lump sum after the bond has reached maturity. The default risk of the bond can be evaluated first-hand to decide if it’s worth investing. It may also be redeemed before the maturity date if it has a “call feature.” Bonds are typically issued in $1,000 or $5,000 denominations. 4. There are three main patterns created by the term structure of interest rates. There are normal, flat, and inverted yield curves. The normal yield curve means that as general current interest rates increase, the price of a bond will decrease and its yield will increase. With a flat yield curve, investors can maximize their risk/return tradeoff by choosing fixed income securities with the least risk or highest credit quality. Lastly, with an inverted yield curve, interest rates decline as time moves farther into the future, which means the yields of long-term bonds will decline. This is a very rare circumstance. This can sometimes be an indicator of a market slowdown. 5. The coupon rate determines if a bond is set at discount value, par, or premium. If it’s discount value, the coupon value is lower than the YTM. If it’s par...
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...their money between different types of investments, they must weigh the trade-off between risk and return. The purpose of the next four chapters is to explore that trade-off in depth. We begin in Chapters 4 and 5 by describing two of the most common types of investments available in the market—bonds and stocks. The bond market is vast, and it plays an extremely important role in the economy. Federal, state, and local governments issue bonds to finance all kinds of public works projects and to cover budget deficits. Corporations sell bonds to raise funds to meet daily operating needs and to pay for major investments. Chapter 4 describes the basic bond features and explains how investors value bonds. Chapter 5 examines the stock market. Valuing stocks is more complex than valuing bonds because stocks do not promise fixed payment streams as do bonds. Therefore, Chapter 5 discusses methods that investors and analysts use to estimate stock values. The chapter also provides a brief explanation of how firms work with investment bank- ers to sell stock to the public and how investors can trade shares of stock with each other. With the essential features of bonds and stocks in hand, Chapter 6 explores the historical returns earned by different classes of investments. The data illustrate that a fundamental trade-off between risk and return confronts investors. Chaucer was right. Investors who want to get rich have to accept risk as part of the deal. Chapter...
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