7.2 Notes Bonds

7.2 Bonds and Other Financial Assets
Objectives
1. Describe the characteristics of bonds as financial assets
2. Identify different types of bonds
3. Describe the characteristics of other types of financial assets.
4. Explain four different types of financial asset markets.

How do borrowers raise money for investment? One of the most important ways is by selling bonds.

Bond – Certificates sold by a company or government to finance projects or expansion.

EX: War bonds during WWII

Bonds are basically IOUs that the government or companies must pay back to investors with a fixed amount of interest. They are generally considered low-risk investments.
Bonds have three basic components:
Coupon Rate – The interest rate that a bond issuer will pay to a bondholder.

Maturity – The time at which payment to a bondholder is due.

Par Value – The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity.
Example: Suppose you buy a bond from a new company, Jeans Inc.
Coupon rate: 5%, paid to the bondholder annually
Maturity: 10 years
Par Value: $1,000






Advantages and Disadvantages
The person who buys a bond is called a “holder,” while the person who sells the bond is an “issuer.”
Bonds are desirable to the issuer because
1. The coupon rate on a bond does not go up or down so companies know exactly how much they will have to pay back.
2. Unlike stockholders, bondholders do not own a part of the company. So a company does not have to share its profits if it becomes wealthy.

Bonds are undesirable to the issuer because
1. A company must make interest payments on bonds, even during bad years.

Types of Bonds

Savings Bond – A low-denomination ($50 to $10,000) bond issued by the US government.

Municipal Bond – A bond issued by a state or local government to finance highways, libraries, parks and schools.

Corporate Bonds – A bond that a corporation issues to raise money to expand its business.

Junk Bonds – A lower-rated, potentially higher-paying bond.

Savings and municipal bonds are generally considered low-risk compared corporate bonds, whereas junk bonds are the riskiest.