ORIE 3150 October 4 2011 Slides - ORIE3150 October4,2011...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
ORIE 3150 October 4, 2011 Bonds
Background image of page 1

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

View Full DocumentRight Arrow Icon
October 22, 2011 Register at www.connect.us.org
Background image of page 2
Explanation n PwC is PricewaterhouseCoopers, an accounting and consulting firm. n The case competition is designed to help you with case interviews, which are common in consulting firm interviews. n It is free n It has nothing to do with China. n It is sponsored by Phi Gamma Nu, a co-ed professional business sorority.
Background image of page 3

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

View Full DocumentRight Arrow Icon
USA Note n The debt market in the USA is relatively lightly regulated and efficient. Other countries, notably Japan, rely on banks for most of their debt financing. n If you do business in the USA, you should consider debt financing.
Background image of page 4
Bankruptcy n Keep in mind that creditors always get paid first. If a firm goes bankrupt and its assets are sold, the creditors are paid off first. n If there is any money left over, the stockholders get it. There usually isn’t any!
Background image of page 5

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

View Full DocumentRight Arrow Icon
Bonds n A bond is a way for a corporation to borrow money. n Bonds are also issued by local, regional, state, and federal government units. n Bonds are normally due 10 to 15 years after issue, sometimes longer.
Background image of page 6
Bonds and Interest n If interest payments are made on the bond, these payments are almost always made semiannually . n The nominal annual interest rate of the bond interest is given. That is, we merely need to divide by c = 2 to get the periodic, semiannual rate. n If no interest payments are made on the bond until it is due, it is a zero coupon bond.
Background image of page 7

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

View Full DocumentRight Arrow Icon
Interest n In the old days, the bond would come with coupons, which were mailed in to the firm or presented to your broker to claim the semiannual interest. n This is largely obsolete for bonds, the payments are made automatically without the need for action on the creditors part.
Background image of page 8
Terms n The company that issued the bond is a debtor, the person who purchases the bond is a creditor. n The creditors’ claims for interest and principal take precedence over all stockholder’s claims. n Secured bonds give the creditor claims to assets of the company upon default, unsecured bonds (aka debentures) do not.
Background image of page 9

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

View Full DocumentRight Arrow Icon
Pricing  n Bond prices are expressed as a percentage of the face value. For example, when bonds with a face value of $100,000 are issued at 97, this means they sell for $97,000. n Notice that the percentage symbol is omitted.
Background image of page 10
Market Economy n When the market demands a higher interest rate than the face interest rate, the bond will sell at a discount (less than face value). n When the market demands a lower interest rate than the face interest rate, the bond will sell at a premium (more than face value). n The selling price is usually close to the face value, between 95% and 105%.
Background image of page 11

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

View Full DocumentRight Arrow Icon
Market Economy n The price a bond sells for is determined by many factors, both exogenous and endogenous.
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 48

ORIE 3150 October 4 2011 Slides - ORIE3150 October4,2011...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online