M10_MISH1438_06_IM_C10

M10_MISH1438_06_IM_C10 - Chapter 10 The Bond Market Purpose...

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Chapter 10 The Bond Market Purpose of the Capital Market Capital Market Participants Capital Market Trading Organized Securities Exchanges Over-the-Counter Markets Types of Bonds Treasury Notes and Bonds Treasury Bond Interest Rates Treasury Inflation Protected Securities (TIPS) Treasury Strips Agency Bonds Municipal Bonds Risk in the Municipal Bond Market Corporate Bonds Characteristics of Corporate Bonds Types of Corporate Bonds Financial Guarantees for Bonds Current Yield Calculation Current Yield
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52 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition Finding the Value of Coupon Bonds Finding the Price of Semiannual Bonds Investing in Bonds Overview and Teaching Tips Chapter 10 examines securities that have an original maturity that is greater than one year. These types of securities are traded in capital markets and the best known securities are stocks and bonds. This chapter focuses on the characteristics of the bonds while the next chapter extends the capital market discussion to stocks. Capital markets are used for long term financing and investments. The beginning of the chapter discusses the purpose of and the participants in the capital market so students will get a better understanding of the topic when it is discussed in depth in later sections. We explore two categories of capital markets: bonds and stocks. Show the students Table 1 because it gives a clear understanding of the different types of Treasury securities. Treasury securities are free of default risk, but not risk-free, and have a very low interest rate. Bonds issued by local, county, and state governments are municipal bonds and are used to finance public interest projects. Point out to students that municipal bonds are not free of default. Corporate bonds usually have a face value of $1,000 and can be redeemed at anytime.
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Chapter 10 The Bond Market 53 The chapter concludes by showing how to compute the value of bonds. An example focuses specifically on valuing semiannual bonds. This valuation model can be used to show that interest-rate risk will affect the wealth of investors in bonds. Answers to End-of-Chapter Questions 1. Investors use capital markets for long-term investment purposes. They use money markets, which have lower yields, primarily for temporary or transaction purposes. 2. The primary capital market securities are stocks and bonds. Most of these are purchased and owned by households. 3. The primary market is for securities being issued for the very first time, and the issuer receives the funds paid for the security. The secondary market is for securities that have been issued previously but are being traded among investors. 4. The par value is the amount the issuer will pay the holder when the bond matures. The coupon interest rate is multiplied times the par value to determine the interest payment the issuer must make each year. The maturity date is when the issuer must pay the holder the par value.
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M10_MISH1438_06_IM_C10 - Chapter 10 The Bond Market Purpose...

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