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Corporate Bonds

Corporate Bonds. Interest Rate. Face Value. Maturity Date. Characteristics. You are loaning $ to a corporation. Characteristics Cont. Typically the face value is $1000 Can be as much as $50,000 Interest is paid twice a year

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Corporate Bonds

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  1. Corporate Bonds

  2. Interest Rate Face Value Maturity Date Characteristics You are loaning $ to a corporation

  3. Characteristics Cont. • Typically the face value is $1000 • Can be as much as $50,000 • Interest is paid twice a year • At the maturity date, you would cash the bond in and receive a check for the face value. • Maturity dates range from 1 to 30 years. • Short Term = 1 to 5 years • Intermediate Term = 5 to 15 years • Long Term = More than 15 years

  4. Why Corporations Sell Corporate Bonds • To borrow money • May be to start a business • May be to finance business activities • A corporation may sell stocks and bonds • Bonds must be repaid • Must be paid interest • Stocks do not have to be repaid • Are not required to pay dividends

  5. Types of Corporate Bonds • Debenture • A bond that is backed only by the reputation of the issuing corporation • Mortgage Bond • A bond that is backed by assets of the company. • Risk is lower, interest rate is lower • Subordinated Debenture • An unsecured bond that gives bondholders claim to interest payments and assets of the corporation only after all other bondholders have been paid. • Convertible Bond • A bond that investors can trade for shares of the corporation’s common stock.

  6. Methods Corporations use to Repay Bonds • Call Feature • Allows a corporation to buy back bonds before the maturity date. • May have to pay the bondholder a premium • Bond Indenture • A legal document that details all of the conditions pertaining to a particular bond issue.

  7. Why Investors Buy Corporate Bonds • Interest Income • Receive Interest Income every 6 months • Registered Bond • Only the owner of the bond can collect money on the bond. • Registered bond coupon • Send the coupon in and the interest will be paid • Bearer Bond • Not registered in the owner’s name • Must present coupon • Will not be repaid if coupon is lost or stollen • No longer issued by corporations • Zero-coupon Bond • Provides no interest payments and is redeemed forr its face value at maturity • Sold far below face value

  8. Bond Repayment • Investors have two choices after they have purchased a bond • First, you can keep the bond until its maturity date and then cash it in. Meanwhile, you earn interest every 6 months. • Or, you can sell the bond at any time to another investor. • Either way, the value of the bond is closely tied to the corporation ability to repay it.

  9. Market Value vs. Face Value • Bond prices shift as a result of changes in overall interest rates in the economy. • If Vanessa has a bond with a 7.5% interest and interest rates fall below 7.5%, the market value of her bond increases. • If overall interest rates rise above 7.5%, new issue bonds would be more valuable. • When a bond is selling for less than its face value it is said to be selling at a discount. • When a bond is selling for more than its face value it is said to be selling at a premium.

  10. Face Value X Annual Interest Rate $1000 X 4.5% Shawn purchased a New York Telephone bond that pays 4.5% interest based on a face value of $1,000. Comparable new corporate bond issues are paying 7%. How much is Shawn’s bond worth? Dollar Amount of Annual Interest Formula = Interest Rate of Comparable New Bond $45 7% = $642.86 The approximate market value of Shawn’s New York Telephone Bond is $642.86

  11. Not too different from the stock exchange A Typical Bond Transaction • Full-service brokerage firm • Provides information and advice • Discount brokerage firm • You do your own research and make your own decisions • Lower commission • Primary Market • Directly from the banker that represents the company • Secondary Market • Trade with other investors • Bonds issued by large corporations are traded on the New York Bond exchange or the American Bond Exchange

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