Bonds - Bonds are issued by businesses as a means of...

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Bonds are issued by businesses as a means of borrowing money. They are, in essence, a note payable where the repayment terms are determined before the amount borrowed is determined. Other businesses or individuals purchase bonds as a means of investing money. The borrower (aka. bond seller or issuer) pays interest for the privilege of having the use of someone else's money. The bond buyer (aka. lender or investor) earns interest because they are loaning their money to someone else to use. Bonds are sold/purchased at the present value of their future cash flows. I.e., the bonds are sold/purchased so that the cash paid and received later will pay back the money borrowed/loaned PLUS interest. The cash paid and received later consist of several semiannual payments/receipts and one lump sum payment/receipt. The semiannual interest payments/receipts are the same amount each six months and therefore are also an annuity. (Annuity: cash flow where the same amount is paid/received more that once AND is paid/received at equal intervals of time AND bear the same interest rate each period.) Sometimes the semiannual payments/receipts are referred to as "rents". The one time lump sum payment/receipt at the end of the contract term is equal to the Face Value; this is also referred to as the Maturity Value because it is the final amount paid/received when the bond matures. TERMS AND SYMBOLS: Maturity date : The due date on the bond. Face value : The amount of money that will be paid or received at the maturity date. Stated rate of interest : The interest rate stated (printed) on the Bond, which is used to determine the amount of periodic (semiannual) payment of cash to the bond investor from the bond seller. E.g., Bond face times stated rate times ½ = cash each six months. This is the annuity portion of the bond.
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This note was uploaded on 04/03/2012 for the course ACCT 272 taught by Professor Mensah during the Fall '08 term at Rutgers.

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Bonds - Bonds are issued by businesses as a means of...

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