M3l7 - Fall 2010 Module 3 Accounting Finance Lecture 7 All About Bonds David Robinson D Robinson 2010 Accounting Finance Accounting Managerial

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David Robinson © D. Robinson, 2010 Fall 2010 Module 3 Lecture 7: All About Bonds
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Accounting Managerial Financial Finance Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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Lecture Outline • Bonds—definition “fixed instruments” • Interest rates and inflation • Duration • Concerns about very long durations • Bonds as investments • They can be resold at any time • Corporate bonds and the risk premium
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Why would you borrow money? • New subdivision—have to come up with a new grade school • Cost $26 million ot of money “up front” • Lot of money “up front” • But grade school will last for 30 years. • Let’s borrow the money • Payoff over 30 years • $26 million at 4.5 percent • Need just $1.6 million a year to make the payments
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Definition: Bond • A financial instrument in which an issuer borrows money and promises to pay ixed interest te agreed in advance • Fixed interest rate agreed in advance • Periodic interest payments called “ coupon payments (every quarter, every 6 mths) • Repay the entire sum ( principal ) on the due date • If the issuer defaults (does not pay either interest or principal when due) bondholder can go to court and force bankruptcy
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Definition: Bankruptcy • A formal “time out”: Creditors have to go to court with evidence of the debt (here, the bond) ourt adds up all that a firm owes and how much money it Someone who is owed money e.g. “Creditors will receive about 10 cents on the dollar = 1/10 th of what they were owed Court adds up all that a firm owes and how much money it has and calculated what proportion (“ cents on the dollar ”) each creditor gets • It’s an orderly process (you can’t pay your brother first) 1. Secured creditors (you get the plane back) 2. Bond holders 3. Unsecured creditors (e.g. workers, suppliers) 4. Common stock holders
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Bonds are “Fixed Instruments” • Unlike stocks, the payoff doesn’t vary at all • Because there is less risk, the interest rate offered is lower than the return that stocks earn • As soon as a bond has been issued, it can be sold from one person to another • Just like you can sell your ugba-10 textbook if you drop the course
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Different types of bonds • Issues by Federal government lso some “agency” bonds Treasuries Tax • Also some “agency” bonds • States, counties and cities • Issued by firms Muni’s Corporates exempt
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If we don’t offer a high enough rate,
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This note was uploaded on 02/05/2011 for the course BUSINESS 10 taught by Professor Johnsmith during the Fall '10 term at UCLA.

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M3l7 - Fall 2010 Module 3 Accounting Finance Lecture 7 All About Bonds David Robinson D Robinson 2010 Accounting Finance Accounting Managerial

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