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What are the two main ways established companies can raise money?

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Presentation on theme: "What are the two main ways established companies can raise money?"— Presentation transcript:

1 What are the two main ways established companies can raise money?

2 Securities Securities*: -Stocks – equity financing -Bonds – debt financing -money market instruments: (derivatives, futures, options) -* vrijednosnice, vrijednosni papiri

3 BONDS MK, U 16 (p 81)

4 Bonds What is a bond? Who buys / sells / issues bonds? Why do they do it?

5 Introduction to Bonds (video) Definition of bonds? Term used for the price of a bond on the primary market? Maturities mentioned? Coupons mentioned? Why do corporations/governments issue bonds? What is important to remember about bonds?

6 What is a bond? A d____ instrument issued by governments, corporations and other entities in order to finance projects or activities. A l____ that investors make to the bond’s i______. Term used for the price of a bond on primary market? F____ value. What is the face value of a bond? The amount l_____ to the issuer. What does the investor receive in exchange for the loan? Interest, known as c______. ebt oan ssuers ent oupon ace

7 What is maturity? The time when a financial instrument (such as a bond or an insurance policy) becomes ready to be p_____. Bonds are issued for a specified period of time. Maturities mentioned? 1 year, 3 years or 30 years Coupons menioned? 8% Why do corporations/govts. issue bonds? To fund capital projects / public projects aid

8 What is important to remember about bonds? The higher the interest rate, the more/less risk it is likely to carry. The higher the interest rate, the more risk it is likely to carry.

9 Debt Finance vs. Equity Finance Reading: BONDS (MK, p.81) Read the text and underline: Two main ways governments can raise money? Two main ways established companies can raise money?

10 Debt Finance vs. Equity Finance (MK, p.81) BONDSFOR INVESTORSFOR ISSUERS ADVANTAGE DISADVANTAGE generally safer shares pay a higher return bond interest is tax deductible WHAT DOES IT MEAN? debt increases a company’s financial risk HOW?

11 More about bonds (MK, p.81) Meaning of T-notes, T-bonds and gilts? Who are market makers? Bid vs. offer price? What is a spread? What is inversely related? What does the yield of a bond depend on?

12 More about bonds (MK, p.81) Meaning of T-notes, T-bonds and gilts? Treasury notes, treasury bonds and gilt-e_____ stock (UK) dged

13 DEBT FINANCING ( = SECURITIES* (part II): BONDS (U16) DEBT FINANCING ( = loans) Risk rating: AAA (best) to C (worst) Companies: BONDS an interest paying loan which can be traded on bond markets securities, papers * vrijednosnice Governments: LONG-TERM BONDS: GILTS – GB TREASURY BONDS-USA TREASURY NOTES-USA SHORT-TERM BONDS: TREASURY BILLS (3-MONTH)

14 More about bonds (MK, p.81) Meaning of T-notes, T-bonds and gilts? Treasury notes, treasury bonds and gilt-e_____ stock (UK) Who are market makers? Banks & b________ companies which q____ bid and offer price. Bid vs. offer price? _____ – the highest price that the buyer is willing to pay _____ – the price asked by sellers What is a spread? D________ between the bid & offer prices (bid/ask or buy/sell) What is inversely related? I_____ r____ in the economy & the price of existing bonds.WHY? What is the yield of a bond and what does it depend on? I______ given by a bond. It depends on its c______ and its purchase price. dged rokerageuote Bid Offer ifference nterest ate ncomeoupon

15 More about bonds (MK, p.81) Meaning of T-notes, T-bonds and gilts? Treasury notes, treasury bonds and gilt-edged stock (UK) Who are market makers? Banks & brokerage companies which quote bid and offer price. Bid vs. offer price? Bid – the highest price that the buyer is willing to pay Offer – the price asked by sellers What is a spread? Difference between the bid & offer prices (bid/ask or buy/sell) What is inversely related? Interest rates in the economy & the price of existing bonds.WHY? What is the yield of a bond and what does it depend on? Income given by a bond. It depends on its coupon and its purchase price.

16 Comprehension, MK p 82 1 F 2T 3T 4F 5T 6F 7F 8F

17 Vocabulary, MK p 82 1 cash flow 2 equity 3 mutual funds 4 pension funds 5 principal 6 maturity 7 coupon 8 insolvent or bankrupt 9 creditors 10 dividends 11 market makers12 bid / bid price 13 offer / offer price 14 yield

18 Match up verbs with nouns, 82

19 HW: The Financing of Corporate Activity, RB p77 Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc. Do exercises I, II & III IV Read and match headings with paragraphs

20 The Financing of Corporate Activity Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc. Features of well-organized writing: 1.Text headings 2.Topic sentences 3.Paragraphing 4.Connectors HW: V RB, p 79 – Make notes on the text using the table on p 79

21 E.g. notes: CORPORATE FINANCE Full text: Generally speaking, three different ways... First,..., Second,..., For example,...Third,... Notes: THREE WAYS OF CORPORATE FINANCE: (e.g....) 3.


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