Section 19.1Corporate Bonds

Mrs. A

What You’ll Learn Identify the characteristics of corporate bonds

Explain the reasons corporate bonds are bought and sold

Corporate BondsCorporate Bonds

Why It’s Important

•More choices to consider when investing

The face of a corporate bond states:

Characteristics of Corporate Bonds

Corporate BondsCorporate Bonds

Interest rate (coupon rate)

Maturity date

Face value (Par value) of the bond

Go Figure. . . A Bond’s Annual Interest Income

Corporate BondsCorporate 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 BondsCorporate Bonds

DebentureDebenture— Backed only by the reputation of the issuing corporation rather than by its specific assets.

Mortgage bondMortgage bond (or secured bond)— a bond that is backed by assets of the corporation.

Types of Corporate Bonds (1 of 2)

Corporate BondsCorporate Bonds

Convertible bondConvertible bond— a bond that an investor can trade for shares of the corporation’s common stock.

Subordinated debentureSubordinated 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 BondsCorporate Bonds

A call featurecall feature allows a corporation to buy back bonds from bondholders before the maturity dates.

A sinking fundsinking fund is a fund to which a corporation makes deposits for the purpose of paying back a bond issue.

Serial bondsSerial 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 BondsCorporate 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 BondsCorporate BondsCorporate Bonds

Different Ways to Get Interest Income

Corporate BondsCorporate Bonds

Bond with coupons attached

Coupon for a Bond

NO Interest Income

Corporate BondsCorporate Bonds

Zero-coupon bondZero-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 BondsCorporate Bonds

Interest Rate Bond Value

Interest Rate Bond Value

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 incomePar Value X coupon value = annual interest income

$300/.08 = $3750

Annual interest income/new coupon value =

Value of the bond