For all practical purposes that piece of paper is a

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Unformatted text preview: you lend him the $10 today. You say okay and hand over $10. Now suppose your friend takes out a piece of paper, and writes the following on it: “I owe the person who returns this piece of paper one month from today a total of $11.” Then he signs his name and gives the piece of paper to you. For all practical purposes, that piece of paper is a bond (an IOU statement) and you, by purchasing the IOU, have become a lender. The Components of a Bond QUESTION: I don’t quite understand how a person who buys something (like a bond) can be called a lender. I thought that when you lend money to someone you just turn over money to that person and he or she pays you back later. 442 Chapter 16 Stocks and Bonds The three major components of a bond are face (par) value, maturity date, and coupon rate. The face value, or par value, of a bond is the total amount the issuer of the bond will repay to the buyer of the bond. For example, suppose Dawson buys a bond from company Z. Let’s say that the face value of the bond is $10,000. It follows that company Z 16 (428-459) EMC Chap 16 5/8/06 5:05 PM Page 443 promises to pay Dawson $10,000 at some point in the future. The maturity date is the day when the issuer of the bond must pay the buyer of the bond the face value of the bond. For example, suppose Dawson buys a bond with a face value of $10,000 that matures on December 31, 2015. On that date, he receives $10,000 from the issuer of the bond. The coupon rate is the percentage of the face value that the bondholder receives each year until the bond matures. For example, suppose Dawson buys a bond with a face value of $10,000 that matures in 5 years and has a coupon rate of 10 percent. He receives a coupon payment of $1,000 each year for 5 years. Jackie buys a bond with a face value of $100,000 and a coupon rate of 7 percent. The maturity date of the bond is 10 years from today. Each year, for the next 10 years, Jackie receives 7 percent of $100,000 from the issuer of the bond. This amounts to $7,000 a year for each of 10 years. In the tenth year, she also receives $100,000 from the bond issuer. With respect to this bond, the ma...
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This document was uploaded on 01/16/2014.

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