The Bond Market
a. Bond- a sophisticated IOU that documents who owes how much
and when payment must be made
b. Risk can never be perfectly quantied and the rating agencies can
c. If a risky company wants to borrow money, it has to promise a
The Modern Quantity Theory of Money is a theory about the demand for money.
Classical Theory of Money: The money stock times the velocity equals the price times
the quantity. M*V=P*Q
Freedman said that people want money because they can use it to buy t
Appropriations of RE versus Restrictions of RE:
Appropriations are by choice, to signal that dividends of this amount will not be paid
so that funds can be used for a specific purpose, such as plant expansion.
Restrictions come from legal contracts that r
Spin-off is when a corp distributes shares of a wholly or substantially owned subsidiary to
The shareholders now own the sub directly, instead of indirectly through the parent.
This transaction is recorded at the book value of the spun-off
is accumulated, undistributed earnings (with adjustments made for a few other stray items).
What does this mean, basically?
Sum of total profits (NI, earnings)
Less total dividends declared (not just paid, why?!)
+/- prior period adjustm
What is the thrill in the corporate form of business?
1. owners have limited liability for debts of the business
2. owners can lose their investment: original cost plus their % share of RE
It is also easier for owners t
Callable Preferred Stock:
Corp can force shareholders to send in their shares to be cancelled for a predetermined price.
Dividends in arrears are typically paid off.
versus Redeemable Preferred Stock: shareholders can force company to buy their
A change in the number of shares o/s accompanied by an offsetting change in the par value
of per share.
The primary purpose of a split is to increase the # shares o/s and decrease the market price
per share (when stock prices get up over $10
be sure to read App 15Athis is really a hybrid of debt and equity.
This doesnt mean that Preferred is better than Common, but that they have sacrificed some
rights for preferences, most commonly in the form of getting dibs (or first claim
Supposedly par is the minimum investment required of owners to protect creditors, but about
85% of US Corporations have a par less than $1.00 per share.
Why such a nominal amount?
1) Cannot sell stock at original issue for less than par., so do