Chap 8_Valuing Bonds - Valuing Bonds Click to edit Master subtitle style M G M G M M T T 50 5 5 Fal 0 l RWJ Chapter 8 Security Claimants M G MT 505

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RWJ, Chapter 8 Click to edit Master subtitle style M G M T 5 0 Valuing Bonds M G M T 50 5, Fal l
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RWJ, Chapter 8 M G MT 505 , Fall 201 1 Security Claimants Firms raise money from the public by typically issuing one of the following three securities: Bonds Stocks Preferred Stock The market in which the firm initially issues the security and gets funds is called the “primary market”. Subsequent trading of these securities happen in the “Secondary Markets” such as the NYSE and NASDAQ. M G M T
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RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Par Value Face Value of the bond. Dollar amount received when the bond matures. For most bonds, this is $1,000. Coupon Annual cash-flow received from the bond. Expressed as a percentage of Par Value. Most bonds pay coupons semiannually. Bonds that pay no coupons, and pay only the par value at maturity are called "Zero Coupon" or "pure discount" bonds. Maturity This is the time till the last coupon payment. At maturity, you get the last coupon and the par value. M G M T
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RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Current Yield Return from coupons for the next period. The ratio of the annual coupon payment as a fraction of current price. Yield to Maturity Annualized return earned by buying the bond today in the market place and holding it till maturity (Assumption: Coupon payments can also be reinvested at the current rate till maturity) Priority If the value of the firm is less than the money owed to the debt holders, the firm is bankrupt. After short term obligations, debt-holders have the first right to the remaining assets in a bankruptcy. Options Bonds can be "Callable“, “Convertible” or both. “Callable” bonds can be retired at the option of the issuer for a predetermined premium over the par value. "Convertible" bonds allow investors to convert the debt for equity in the firm at the investors’ option. M G M T
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RWJ, Chapter 8 M G MT 505 , Fall 201 1 Secondary Market Bonds, other than Treasuries (bonds issued by the Federal Reserve), are not very liquid. Most of the trading on bonds take place in the over the counter market or in the NYSE. Most OTC dealers are located in New York. Variable Rate bonds In periods of high interest rates, it is common to see a growth in bonds with "floating" or "variable" interest rates. Other “options” Some bonds are issued with "Warrants“, which allow the investor to buy stock from the company for a specific price. “Putable" bonds allow the investor to sell the bond back to the issuer at par at certain times . Bond Characteristics M G M T
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RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Bond Indenture Specifies rights of bond investors, and in general, how the firm can use the proceeds from the issue. There is a corporate trustee who oversees that the
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This note was uploaded on 09/30/2011 for the course SCHOOL OF 101 taught by Professor Abc during the Fall '11 term at Binghamton University.

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Chap 8_Valuing Bonds - Valuing Bonds Click to edit Master subtitle style M G M G M M T T 50 5 5 Fal 0 l RWJ Chapter 8 Security Claimants M G MT 505

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