This preview shows page 1. Sign up to view the full content.
Unformatted text preview: of interest
rates reflects the relationship between the interest
rate, or rate of return, and the time to maturity.
Yield curves can be downward-sloping (inverted),
upward-sloping (normal), or flat. Three theories—
expectations theory, liquidity preference theory, and
market segmentation theory—are cited to explain
the general shape of the yield curve. Risk premiums
for non-Treasury debt issues result from interest
rate risk, liquidity risk, tax risk, default risk, maturity risk, and contractual provision risk.
LG1 LG2 Review the legal aspects of bond financing and
bond cost. Corporate bonds are long-term debt instruments indicating that a corporation has borrowed an amount that it promises to repay in the
future under clearly defined terms. Most bonds are
issued with maturities of 10 to 30 years and a par
value of $1,000. The bond indenture, enforced by a
trustee, states all conditions of the bond issue. It
contains both standard debt provisions and restrictive covenants, which may include a sinking-fund
requirement and/or a security interest. The cost of
bonds to an issuer depends on its maturity, offering
size, and issuer risk and on the basic cost of money.
Discuss the general features, quotations, ratings,
popular types, and international issues of corporate bonds. A bond issue may include a conversion
feature, a call feature, or stock purchase warrants.
Bond quotations, published regularly in the financial press, provide information on bonds, including
current price data and statistics on recent price behavior. Bond ratings by independent agencies indicate the risk of a bond issue. Various types of traditional and contemporary bonds are available.
Eurobonds and foreign bonds enable established
creditworthy companies and governments to borrow large amounts internationally.
LG3 294 PART 2 Important Financial Concepts Understand the key inputs and basic model
used in the valuation process. Key inputs to the
valuation process include cash flows (returns), timing, and risk and the required return. The value of
View Full Document