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

2. BONDS MK, U 16 (p 81)

3. Bonds What? Who? Why?

4. What? A bond is a debt instrument: borrowing/lending: face value (principal) coupon (interest rate) Who? bond issuers governments (government bonds) companies (corporate bonds) bondholders - individuals & institutional investors -selling or holding bonds until maturity

5. Why? Definition of 'Debt Instrument' A paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower. Interesting collocations the ________ party (bond issuer) to raise ______ to promise to _______ a _______

6. Introduction to Bonds (video) http://www.investopedia.com/video/play/understanding-bonds 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?

7. 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

8. 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

9. 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.

10. Debt Finance vs. Equity Finance Reading: BONDS (MK, p.81) Two main ways governments can raise money? Two main ways established companies can raise money?

11. 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?

12. 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?

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

14. 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 SHORT-TERM BONDS: TREASURY BILLS (3-MONTH)

15. 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

16. 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.

17. Comprehension, MK p 82

18. 1 F 2T 3T 4F 5T 6F 7F 8F

19. Vocabulary, p 82

20. 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

21. Match up verbs with nouns, 82

22. Match up verbs with nouns borrow money deduct interest payments finance activitiesissue shares issue bondspay (a rate of) interest pay a (higher) returnpay dividends pay taxreceive interest payments raise money repay principal sell assets deduct taxreceive dividends repay bonds repay moneysell bonds

24. The Financing of Corporate Activity, RB p37 Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc. Match headings with paragraphs Text headings: Corporate finance Stocks vs. Bonds Bond risks

25. 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

26. CORPORATE FINANCE Full text: Generally speaking,...... three different ways... First,..., Second,..., For example,...Third,... Notes: THREE WAYS OF CORPORATE FINANCE: 1. 2..... (e.g....) 3.

27. CORPORATE FINANCE Full text: Generally speaking,...... three different ways... First,..., Second,..., For example,...Third,... Notes: THREE WAYS OF CORPORATE FINANCE: 1. internally, out of undistributed corporate profits 2. borrowing from financial institutions (e.g. a commercial bank, a savings and loan association, an insurance company) 3. issuing common stocks and bonds

28. STOCKSVS.BONDS Full text: In contrast,..., For example,... This means that... There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other,.... Notes: STOCKSvs.BONDS -ownership-lending -less risky:1. 2.

29. STOCKSVS.BONDS Full text: In contrast,..., For example,... This means that... There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other,.... Notes: STOCKSvs.BONDS -ownership-lending -less risky: 1. legally prior claim 2. income “guaranteed”

30. BOND RISKS Full text: clear paragraphing & topic sentences Notes: CORPORATE BOND RISKS 1. 2. 3.

31. BOND RISKS Full text: clear paragraphing & topic sentences Notes: CORPORATE BOND RISKS 1. market value of bonds may fall, selling before maturity may cause you to incur a capital loss 2. price of existing bonds varies inversely with interest rates in the economy 3. inflation

32. Friday, 10 May 2013 Progress test: REPORT (20 points) 1st PT: 40 + Report: 20 + 2nd PT: 40 = 100 (51 = pass) Task: A choice of two Time: 45 min Elements of grading: Headings: ½ each (wording and position) – maximum 3 pts Phrases: min 1 per section – 1 point each (correctly used)* Content: graded on a scale form 0 to 3 Vocabulary: graded on a scale from 0 to 3 Grammar: graded on a scale from 0 to 3 Spelling: graded on a scale from 0 to 3 *Chance to win up to 3 bonus points.