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Ch 5 Notes Part 2.docx

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Valerie Irie

Chapter 5 Economic FactorsInvestment Instruments Learning ObjectivesDescribe the characteristics and types of bonds and stocksUnderstand the factors that affect the value and price of a bonds and stocksUnderstand the concept of yield in general and for bondsDiscuss the relationship between bond prices and prevailing interest ratesUnderstand how to readinterpret a bond and stock quotationDescribe additional investment vehiclesUnderstand the concept of financial leverageMargin buying and short selling understand use of leverage rules transaction steps risks benefits similarities and differences Types of Investments BONDSRepresents debt for issuing corporation or governmentBond is a debt instrument in terms of the company that issues that bondUses the bond to raise capital company that issues enter into a borrowing agreementAdvantage of issuing debt is that ownership is not lost but have to pay back bond money received plus interest over the life of the bond and principal at the of the life of the bondCharacteristics Legal binding agreementLegal recourse if principal and interest not paidFixed rate of return often paid semiannuallyReturn is fixed set out upon issue of that bondBond will state exactly when they are paid coupon rate promised for the life of the bondSet the rate for the year but split the annual interest into two paymentsFixed termprincipal repaid at maturityMaturity date does not last foreverBond agreement akin to a loan agreement the principal will be returned at a given datePriority over stockholdersCreditor can give loan to corporation and they can raise money through equity tooCreditor has top priority over other stakeholdersOrganization must ensure that creditors payed first Types of BondsInvestment dealers help put together different bond features in order to make them attractive and raise capitalTypesSecured vs Unsecured debenturesSecureHave valuable assets that back up promise to payUnsecure DebenturesNo valuable assets only promise to payA lot of government bonds debenturesRegistered vs BearerRegisteredIssuing company keeps track of who owns bond ie name address sends them interest capital etcBearerDo not keep tracks of who owns bondsOwner responsible for collecting coupon rate and principal upon maturity dateFeaturesCallableIssuer can callpay back the bond from the bond holder earlySave money on future interest
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