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l02.fall10 - Lecture 2 page 8 REVIEW OF BASIC FINANCIAL...

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Lecture 2 page 8 R EVIEW OF B ASIC F INANCIAL I NSTRUMENTS : Debt and Equity What is a financial instrument ( security )? Debt Debt: What is it? 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 Who issues bonds? Treasury bonds Corporate bonds Municipal bonds Foreign bonds - Richard T. Bliss, Babson University and Terry D. Nixon, Miami University
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Lecture 2 page 9 Types of debt instruments bills – notes – bonds - Why would an investor buy debt securities? That is, why would one lend money to a firm? How would we determine the value of any debt instrument? Debt can be secured or unsecured . Secured bonds - Unsecured bonds or debentures - All debt claims, i.e., of interest and principal, have priority over ANY equity claims.
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