Section 19.1 Corporate Bonds Mrs. A

What You’ll Learn  Identify the characteristics of corporate bonds  Explain the reasons corporate bonds are bought and sold Corporate Bonds Why It’s Important More choices to consider when investing

The face of a corporate bond states: Characteristics of Corporate Bonds Corporate Bonds  Interest rate (coupon rate)  Maturity date  Face value (Par value) of the bond

Go Figure... A Bond’s Annual Interest Income Corporate Bonds 8.5% 100 =.085 The amount of money you earn from interest on a bond.

 Borrow money for major purchases  Raise money when it is difficult to sell stock  To finance regular business activities  To reduce the amount of tax a corporation must pay Why Corporations Sell Corporate Bonds Corporate Bonds

Debenture Debenture— Backed only by the reputation of the issuing corporation rather than by its specific assets. Mortgage bond Mortgage bond (or secured bond)— a bond that is backed by assets of the corporation. Types of Corporate Bonds (1 of 2) Corporate Bonds

Convertible bond Convertible bond— a bond that an investor can trade for shares of the corporation’s common stock. Subordinated debenture 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. Types of Corporate Bonds (2 of 2) Corporate Bonds

call feature  A call feature allows a corporation to buy back bonds from bondholders before the maturity dates. sinking fund  A sinking fund is a fund to which a corporation makes deposits for the purpose of paying back a bond issue.  Serial bonds  Serial bonds allow a corporation to repay bond issues over several years because these bonds are issued at the same time but mature on different dates. Methods Corporations Use to Repay Bonds Corporate Bonds

 Safe investments  Diversify portfolios  Increase in value depending on the bond market  The face value of the bond is repaid when it reaches maturity  Interest income $$$$$ Why Investors Buy Corporate Bonds Corporate Bonds

Different Ways to Get Interest Income Corporate Bonds 1.Registered bond 1.Registered bond—a bond registered in the owner’s name Interest checks mailed to owner 2.Coupon bond 2.Coupon bond—a bond registered in the owner’s name for the face value only Interest paid to holder of detachable coupons 3.Bearer bond 3.Bearer bond—a bond not registered in the investor’s name. Interest paid to holder of the coupons **Bearer bond: Anyone who had possession of the bond could collect on them. No longer issued, but some are still in circulation.**

Bond with coupons attached

Coupon for a Bond

NO Interest Income Corporate Bonds  Zero-coupon bond  Zero-coupon bond—a bond that provides no interest payments. It is sold at price far below its face value and redeemed at maturity for face value.

Go Figure... A Bond’s Market Value The value of a bond and the interest rate of new bonds issued in the market have an inverse relationship. Corporate Bonds Interest Rate Bond Value Interest Rate Bond Value

For Example You have a bond that has a coupon value of 6%, par value of $5000. New bonds are being issued at 8%. 1. Will your bond increase or decrease in value? 2. How much is your bond worth? $5000 X.06 = $300 annual interest income Par Value X coupon value = annual interest income $300/.08 = $3750 Annual interest income/new coupon value = Value of the bond