Student Notes 2 20160126 Ch2&3.pdf - Chapter 2 3 Notes...

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Chapter 2 & 3 Notes What is a bond o A security where the issuer promises to pay some fixed amount of money at some fixed point in time Security--> contract Issuer--> Borrower Fixed amount--> Principal and Interest Fixed Point--> Interest payments, Maturity date= When principal is paid o If contract is violated (Payment not made) this is called default. o If a firm defaults then the court can force the firm to pay: called bankruptcy Restructuring Selling off assets Investors can choose to purchase a bond o Investor demand will determine the price of the bond o Higher demand => Higher Price o Example: A firm issues a bond: Maturity: 1 year Principle: $1,000--> par value or face value No Coupons= no interest payments Called zero-coupon bond
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