CHAPTER 19 terms

Understanding Business

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CHAPTER 19 - Securities Markets The Function of Securities Markets Financial marketplaces for stocks and bonds: assist businesses in finding long-term finding to finance capital needs and provide private investors a place to buy and sell securities (investments) that can help them build their financial future Primary Markets handle sale of new securities - IPO’s IPO Initial Public Offering the first public offering of a corporation’s stock Secondary Markets handle the trading of securities between investors with the proceeds of a sale going to the investor selling the stock, not the corporation selling it Investment Bankers specialists who assist in the issue and sale of new securities Institutional Investors large organizations that invest their own funds or the funds of others - orgs are: pension funds, mutual funds, insurance companies and banks Bond a corporate certificate indicating that a person has lent money to a firm companies that issue bonds have legal obligations to make regular payments to investors and repay the entire bond principal amount at a prescribed time Bond language Interest the payment the issuer of a bond makes to the bond-holders for use of the borrowed money - rate varies due to the economy, company reputation, ongoing government bond or similar bond interest rates - government bonds are considered safe investments Coupon Rate - called that because when no accounts of ownership or transfership were held, the interest on the bond was obtained by clipping coupons attached to the bond and sending them to the issuing company for payment Denominiation amount of debt represented by one bond Maturity Rate the exact date the issuer of a bond must pay the principal to the bondholder Advantages Bondholders are creditors and have no vote on corporate matters Interest paid is tax deductible to the firm issuing the bond Temporary source of funding for a firm Can be repaid before maturity date if they contain a call provision and are convertible to common stock Disadvantages Increases debt and may adversely affect the market’s perception of the firm Paying interest on the bonds is a legal obligation The face value (denomination) of the bond must be repaid on the maturity date Different classes of bonds Unsecured Bonds Debenture Bond unsecured bonds - not backed by any collateral Secured Bonds are backed by some tangible asset pledged to the bondholder if bond interest isn’t paid or the principal isn’t paid back when promised Sinking Fund a reserve account - the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond -
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Sinking Funds are attractive because: Provide for an orderly retirement (repayment) of a bond issue Reduce the risk the bond will not be repaid Market price of the bond is supported because the risk of the firm’s not repaying the principal on the maturity date is reduced
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This document was uploaded on 10/29/2011 for the course MGT 111 at Harper.

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CHAPTER 19 terms - CHAPTER 19 Securities Markets The...

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