10 - FIN 300 Fundamentals of Finance Bonds Pt.1 Chapter 8 FIN 300 Bonds Pt 1 1 Bonds What is a bond FIN 300 Bonds Pt 1 2 Bonds Answers Loan Way for a

10 - FIN 300 Fundamentals of Finance Bonds Pt.1 Chapter 8...

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FIN 300 Fundamentals of Finance Bonds Pt.1 Chapter 8 1 FIN 300 - Bonds Pt. 1
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Bonds What is a bond? FIN 300 - Bonds Pt. 1 2
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Bonds Answers: Loan Way for a business or governmental entity to borrow money Form of debt financing Or, raising debt “capital” to fund investments of a business or government Contractual promise to pay a schedule of specific payments (or, cash flows) in the future Failure to make payment results in default and/or potential bankruptcy FIN 300 - Bonds Pt. 1 3
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Bonds More specifically a bond is a type of “security” A legal claim on the assets of the bond’s issuer May be traded back-and-forth A bank may sell a loan – but, we think of bonds as assets that are more easily standardized and traded In fact, a large number of loans (mortgages, home equity, car, student, credit card receivables, business loans, etc.) are sold off, pooled, and re-packaged as bonds, which are easier to sell than the original loans FIN 300 - Bonds Pt. 1 4
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Bond Issuers and Markets Treasury U.S. Gov’t debt Massive and highly liquid (easily traded) segment of the bond market Widely held and very frequently traded around the world Corporate Issued by companies Municipal (“Muni’s”) Issued by any level of government (other than federal) State, county, city, state university, water district, school district, tollroad, etc. Tax Exempt – interest is non-taxable by IRS and (typically) the same state FIN 300 - Bonds Pt. 1 5
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Bond Markets Domestic vs. International Investors or financial institutions may hold U.S. or foreign bonds Sovereign debt – issued by a government Foreign corporations Other international entities FIN 300 - Bonds Pt. 1 6
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Bond Markets A few points - FYI Bonds do not trade on organized “exchanges,” such as the New York Stock Exchange (NYSE) or NASDAQ Bonds trade over-the-counter (OTC) Trades are between individual bond “dealers,” which are types of banks Most of us don’t hold individual bonds We own them via mutual funds, pension funds, other retirement funds such as 401k, etc. Many bonds are owned by financial firms such as banks, life insurance companies, etc. FIN 300 - Bonds Pt. 1 7
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Bond Ratings Bonds tend to be more standardized Investors care less about specific issuer Investors care more about the general category Treasury vs. Corporate vs. Municipal Maturity – life of the bond Rating of the issuer Investment grade – many investors and investment funds will only own bonds with a fairly high credit rating Speculative grade – aka. “junk” bonds – these investors are taking on a greater risk of default in order to get a higher return FIN 300 - Bonds Pt. 1 8
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Bond Ratings There are 3 major companies that issue bond ratings – based on default risk Standard & Poor’s (S&P), Moody’s, and Fitch S&P is the most famous for their ratings AAA is the highest, followed by AA, A, BBB, BB, etc.
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