03%20bonds - Bonds - 1 FNAN 301 Financial Management Bonds...

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Unformatted text preview: Bonds - 1 FNAN 301 Financial Management Bonds Bonds - 2 Topics Covered Overview of bonds Bond value and yield-to-maturity Key relationships associated with bond value Rate of return for a bond Bonds - 3 Overview of Bonds Patriot Theaters owns and operates 145 movie theaters in the Mid-Atlantic Region The firm wants to expand into New England, but needs money One way that it can raise money is by borrowing, which is also referred to as debt Bonds - 4 Overview of Bonds Key characteristics of debt Creditors give money to firm in exchange for promised scheduled payments Payments do not increase if the firm does well The promised payments are the most that bondholders receive However, there is a risk that all or some of the promised scheduled payments may not be made This risk is called default risk or credit risk Creditors can take legal recourse to try to secure payment, which may or may not be successful Example: force firm into bankruptcy Lenders, also called creditors, do not own the firm Lenders have little control over firm Interest paid on debt is tax deductible to the firm Considered a business cost Bonds - 5 Overview of Bonds One way that a firm can borrow is by selling, also called issuing, bonds to investors The firm, which is the borrower, gets cash The investors, who are the lenders, get bonds, which entitle them to receive promised cash flows (that are subsequently made) Bonds - 6 Overview of Bonds The primary market is the market for the sale of new securities by the corporation Primary bond market involves a bond issuer like a company raising money by selling bonds to investors The secondary market is the market in which previously issued securities are traded among investors Secondary bond market involves one investor selling bonds to another investor Bond issuer like a company gets no money from transactions in the secondary market Bonds - 7 Overview of Bonds A bond is a debt security that obligates the issuer to make specified payments to the bondholder over a given length of time Payments typically involve Interest (cost of borrowing money) Principal (repayment of borrowed funds) End of the given length of time is referred to as maturity Maturity is the point in time when the borrower is required to have fully met its obligation by repaying all interest and principal Bonds - 8 Overview of Bonds Face value, also called par value or principal value, is the amount that is repaid to the investor when a bond matures Does not include any interest payments that are paid at maturity Face value is frequently the amount initially borrowed Bonds - 9 Overview of Bonds The coupon refers to the interest payment made to the bondholder Often semi-annual The coupon rate equals the total annual coupon payments made by a bond divided by the face value of the bond For example, if a bond has a face value of $1,000 and...
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03%20bonds - Bonds - 1 FNAN 301 Financial Management Bonds...

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