ISE2014_Class13

ISE2014_Class13 - Class 13 - Bonds ISE 2014 Click to edit...

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Click to edit Master subtitle style Class 13 - Bonds ISE 2014 Fall 2010
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Your Methods PW Method FW Method AW Method IRR Method
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History of Bonds Let’s set the stage We’re going back to 14th century Italian peninsula At the time Italy as a nation did not exist, it was a collection of powerful, independent city- states These city-states often went to war with each other, hiring mercenaries to bolster their limited militaries
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History of Bonds1
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History of Bonds2 These city-states had a problem, wars are expensive In particular, they have a huge initial investment if mercenaries are involved Need a way to raise large sums of money quickly without angering population
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History of Bonds2 So why not just take out loans and borrow the money? Well there’s another problem – usury Charging interest on loans was strictly forbidden at the time Who would loan the cities money if they don’t pay interest?
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History of Bonds2 So how can we get money now without breaking the laws of usury? In the 15th century the city of Florence came up with a brilliant idea to sell what we now call bonds to all of its citizens In order to get around usury, the government required all citizens to participate (it can’t be a sin if you didn’t have free will)
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The First Bonds In return for being forced to buy this bond, the citizens would get a return on their investment They would receive incremental interest payments until the bond matured This was followed by a lump sum payment upon maturity
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The First Bonds This proved to be a wildly popular innovation The government allowed bonds to be traded (fungible) and would pay whoever held the bond A market quickly popped up for buying and selling these bonds Bonds proved so popular that they’re still common today and have continued to evolve
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This note was uploaded on 02/28/2011 for the course ISE 2014 at Virginia Tech.

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ISE2014_Class13 - Class 13 - Bonds ISE 2014 Click to edit...

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