2 Debt or Equity? Bonds are ________, whereas stocks are _______. By purchasing ________(stock) an investor becomes an owner in a corporation.By purchasing ________(bonds) an investor becomes a creditor to the corporation (or government).Investopedia Videodebtequity
3 WHO DOES WHAT?The bond issuerThe bondholderThe credit rating agency…borrows money.…lends money.…pays back the principal.…rates companies.…receives interest (the coupon).…gives low rating to companies with high chance of default.…pays interest.
4 The bond issuerThe bondholderThe credit rating agencyborrows moneypays back the principalpays interestlends moneyreceives interest (the coupon)rates companiesgives low rating to companies with high chance of default
5 Bond Issuer/ Bondholder/ Coupon/ Maturity Date/ Bid Price/ Yieldthe date on which the borrower will repay the investors their principal.the fixed interest rate that the issuer pays to the lender.the company, state or country issuing the bond.the owner of a corporate or government bond (the lender, the creditor).annual return until the bond matures.the price someone is willing to pay for the bond.
6 Bond Issuer - the company, state or country issuing the bond Bond Issuer - the company, state or country issuing the bond. Bondholder – the owner of a corporate or government bond (the lender, the creditor). Coupon - the fixed interest rate that the issuer pays to the lender. Maturity Date - the date on which the borrower will repay the investors their principal. Bid Price - the price someone is willing to pay for the bond. Yield - annual return until the bond matures.
8 Bond rating agencies / Credit rating agencies ‘THE BIG THREE’ FITCH, MOODY’S, STANDARD & POOR’S Companies that _________________the creditworthiness of both debt securities and their issuers. Each uses a unique letter-based rating system to quickly convey to investors whether a bond carries a low or high risk of __________and whether the issuer is financially stable.assess/evaluate/ratedefault
9 How can companies finance their activities? READING, MK p. 81How can companies finance their activities?What is the role of investment banks in bond issuing?When is the principal repaid?How often is coupon received?What are Treasury Notes? And Treasury Bonds?What does it mean that bonds are saleable?What do market makers do?What does the price of a bond depend on?
11 BONDS For companies For investors Disadvantages Advantages debt increases financial riskbondholders do not share in the profitsAdvantagesbond interest is tax deductible (interest payments are deducted from profits before paing tax)higher claim on assets than shareholderssteady income stream