econ423lec14

econ423lec14 - 7/9/2009 1 THE BOND AND STOCK MARKETS THE...

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Unformatted text preview: 7/9/2009 1 THE BOND AND STOCK MARKETS THE BOND AND STOCK MARKETS JULY 9 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Wrapping up Bond Markets b Corporate Bonds b Valuation and Current Yield Revisited b The Stock Market b Portfolio Update b Market Details and Structure b Homework Quiz #5 Distribution Recall from last time b Bonds are securities that represent debt owed by the issuer to the investor b Specified payments on specific dates. b Yesterday, we examined: b Long-term government bonds (T-bonds) b Municipal bonds b We begin today by looking at corporate bonds. Corporate Bonds b Typically have a face value of $1,000 b Some have a face value of $5,000 or $10,000 b Most pay interest semi-annually b Many corporate bonds have a call option b Allows the issuer (the debtor) to repay the bond early. b The degree of risk on these bonds varies from low risk (AAA) to higher risk b Any bonds rated lower than BBB are considered sub-investment grade (junk bonds) Junk Bonds b Debt that is rated below BBB b Often, trusts and insurance companies are not permitted to invest in junk debt b Some debt issuers purchase financial guarantees b Purchased by some bond issuers to lower the risk of their debt. b Pays interest and principal in case of default b Usually backed by large insurance companies. Corporate Bonds The higher risk associated with lower grade bonds also warrants a higher return. 7/9/2009 2 From the Wall Street Journal The Article Continues Corporate Bond Details b Registered Bonds b Replaced bearer bonds (paper) b IRS can track interest income this way b Restrictive Covenants b Mitigates conflicts with shareholder interests b May limit dividends, new debt, ratios, etc. b Conversion b Some debt may be converted to equity b Similar to a stock option, but usually more limited Call Provisions b Right of issuer to order the buyer to sell the bond back....
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423lec14 - 7/9/2009 1 THE BOND AND STOCK MARKETS THE...

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