{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lec2 - Lecture 2 page 8 REVIEW OF BASIC FINANCIAL...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 2 page 8 R EVIEW OF B ASIC F INANCIAL I NSTRUMENTS : Debt and Equity What is a financial instrument ( security )? A legal agreement representing a claim by the holder on the issuer. e.g. debt (bond) and equity (stock) Debt Debt: What is it? A loan , IOU Like any loan, there are contractual elements to any debt instrument: IRS Definition 1. promise to repay interest and principal 2. fixed maturity date 3. “fair” market rate of interest 4. debtholders cannot also be significant equityholders (Agency problems) Who issues bonds? Treasury bonds – U.S. government. Default “risk free”. Still has interest rate risk. Corporate bonds- Many different risk levels. Municipal bonds – (munis) state and local government. No federal tax. Foreign bonds – bonds from foreign corporations and governments. - Richard T. Bliss, Babson University and Terry D. Nixon, Miami University
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Lecture 2 page 9 Types of debt instruments bills – mature in less than one year from date of initial issuance notes – one to ten years bonds – more than ten years Why would an investor buy debt securities? That is, why would one lend money to a firm? Buying “certainty” of cash flows (cf). Default risk is still present. Buyer exchanges cash today for future CFs.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}