Notes On Bonds And Bonds

Introduction to the Financial System Financial Instruments Financial instruments can be: • Equity This is usually through the selling of common shares and/or common stock. It gives the buyer some ownership of the firm and thus, voting power when it comes to electing the board of directors. Debt This is money that is borrowed from someone else. Debt must be repaid at set intervals. Debt can be divided into short and long-term debt. This should follow the matching principle where short-term assets should be funded with short-term debt.

1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assumes that each bond has $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate or return.

There are organizations that decide to issue bonds in most cases go through a series of six steps:

Bonds require a minimum amount of money to purchase and a minimum length of time to hold on to the bond.

The Yield to Maturity (YTM) of a bond is:   Interest rate that makes the present value of the bond’s

Answer: The Coupon Rate is a generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. As stated in the textbook, the annual coupon dividen by the face value is called the coupon rate of the bond. The YTM rate of return anticipated on the bond if it is held until the maturity Date. YTM is considered a long-term bond yield expressed as an annual rate.

1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value?

In return for that money, the issuer provides you with a bond in which it promises to pay a certain rate of interest during the life of the bond, and to repay the face value of the bond (the principle) at its maturity date. Among the types of bonds available for investment are: U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities and foreign government bonds. Zero-interest or coupon municipal bonds are my number one choice because these bonds can be purchased for a small amount, then at its maturity date, or earlier call date these bonds usually pay the face value. Now to me, this is a smart investment choice especially for retirement.

35) The correlation between an interest rate on a debt instrument and the level of security is: C

Interest rate risk the price of the bonds changes because of the increase and decrease of the interest rates.

2. Miller Corp. has a premium bond making semiannual payments. The bond pays an 8% coupon, has a YTM of 6%, and has 10 years to maturity. The Modigliani Corp. has a discount bond making annual payments. The bond pays a 6% coupon, has a YTM of 8%, and also has 10 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? Please also illustrate your answers by graphing bond prices versus time to maturity.

Examples of bond rating agencies include Standard and Poors as well as Moodys. According to the bond credit ratings issued by Standard and Poors, as shown in appendix 1, bonds given an AAA rating have got an almost zero level of credit risk. Nonetheless, bonds rated A and above appear to be safe investments whereas bonds with BBB ratings and below appear as relatively riskier investments.

A bond is a "security" which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the "trust indenture", a legal document, which specifies all of the bond's features and the legal rights and obligations of all the parties to the agreement (http://www.finpipe.com/bndchar.htm).

Along with the many different characteristics of bonds such as, the way the pay their interest, the market they are issued in, the currency they are payable in, protective features and their legal status. Bond issuers may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category.

A call provision in a bond issue, the issuer of the bond principal plus any call premium costs and allows for early repayment. Interest rates have declined greatly in the economy, most of the time because it is a bond issuer, it is. The issuer issues new securities to current securities and lower interest calls. For this you have to pay each year for the issuer to reduce interest payments