Financial_Accounting_Oct_3_Bonds

Financial_Accounting_Oct_3_Bonds - ORIE 350 October 3, 2006...

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    ORIE 350 October 3, 2006 Bonds
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    Prelim I Re-grades Either give them to me or put them in the homework submission box. Deadline for re-grades is Thursday, Oct. 5.
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    Homework #6 Because of Fall Break, there is no lecture on October 10. Hence, Homework #6 is due on Thursday, October 12. Homework #7 is due Tuesday, October 17. There is NO SECTION AT ALL next week. There is lecture as usual on October 12.
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    USA Note The debt market in the USA is relatively lightly regulated and efficient. Other countries, notably Japan, rely on banks for most of their debt financing. If you do business in the USA, you should consider debt financing.
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    Bankruptcy Keep in mind that creditors always get paid first. If a firm goes bankrupt and its assets are sold, the creditors are paid off first. If there is any money left over, the stockholders get it. There usually isn’t any!
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    Bonds The most common type of long-term debt is a bond. Bonds are normally due 10 to 15 years after issue, sometimes longer.
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    Bonds and Interest If interest payments are made on the bond, these payments are almost always made semiannually . The nominal annual interest rate of the bond interest is given. That is, we merely need to divide by c = 2 to get the periodic, semiannual rate. If no interest payments are made on the bond until it is due, it is a zero coupon bond.
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    Interest In the old days, the bond would come with coupons, which were mailed in to the firm or presented to your broker to claim the semiannual interest. This is largely obsolete for bonds, the payments are made automatically without the need for action on the creditors part.
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    Terms The company that issued the bond is a debtor, the person who purchases the bond is a creditor. The creditors’ claims for interest and principal take precedence over all stockholder’s claims. Secured bonds give the creditor claims to assets of the company upon default, unsecured bonds (a.k.a. debentures) do not.
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    Pricing  Bond prices are expressed as a percentage of the face value. For example, when bonds with a face value of $100,000 are issued at 97, this means they sell for $97,000.
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    Market Economy When the market demands a higher interest rate than the face interest rate, the bond will sell at a discount (less than face value). When the market demands a lower interest rate than the face interest rate, the bond will sell at a premium (more than face value).
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  Market Economy The price a bond sells for is determined by many factors, both exogenous and endogenous. Exogenous factors might be based upon the interest rates on government bonds, and the general feeling towards debt. Endogenous factors are summarized in the
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This note was uploaded on 04/05/2009 for the course ORIE 350 taught by Professor Callister during the Summer '08 term at Cornell University (Engineering School).

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Financial_Accounting_Oct_3_Bonds - ORIE 350 October 3, 2006...

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