What are the two main ways established companies can raise money?

• What are the two main ways established companies can raise money?

Securities

• Securities*:- Stocks – equity financing- Bonds – debt financing- money market instruments:

• (derivatives, futures, options)

- * vrijednosnice, vrijednosni papiri

BONDS

MK, U 16 (p 81)

Bonds• What is a bond?

• Who buys / sells / issues bonds?

• Why do they do it?

Introduction to Bonds (video) http://www.investopedia.com/video/play/understanding-bonds

• Definition of bonds?• Term used for the price of a bond on the primary

market? • Maturities mentioned?• Coupons mentioned?• Why do corporations/governments issue bonds?• What is important to remember about bonds?

What is a bond?• A d____ instrument issued by governments,

corporations and other entities in order to finance projects or activities. A l____ that investors make to the bond’s i______.

Term used for the price of a bond on primary market?

• F____ value. What is the face value of a bond?• The amount l_____ to the issuer.What does the investor receive in exchange for

the loan?• Interest, known as c______.

ebt

oanssuers

ent

oupon

ace

What is maturity?• The time when a financial instrument (such as

a bond or an insurance policy) becomes ready to be p_____. Bonds are issued for a specified period of time.

Maturities mentioned?• 1 year, 3 years or 30 yearsCoupons menioned?• 8%Why do corporations/govts. issue bonds?• To fund capital projects / public projects

aid

What is important to remember about bonds?

• The higher the interest rate, the more/less risk it is likely to carry.

• The higher the interest rate, the more risk it is likely to carry.

Debt Finance vs. Equity Finance

• Reading: BONDS (MK, p.81)

Read the text and underline:

• Two main ways governments can raise money?

• Two main ways established companies can raise money?

Debt Finance vs. Equity Finance(MK, p.81)

BONDS FOR INVESTORS FOR ISSUERS

ADVANTAGE

DISADVANTAGE

generally safer

shares pay a higher return

bond interest is tax deductibleWHAT DOES IT MEAN?

debt increases a company’s financial riskHOW?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?

• Who are market makers?

• Bid vs. offer price?

• What is a spread?

• What is inversely related?

• What does the yield of a bond depend on?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)dged

SECURITIES* (part II): BONDS (U16) DEBT FINANCINGDEBT FINANCING ( = ( = loans)

Risk rating: AAA (best) to C (worst)

Companies:

BONDSan interest paying

loan

which can be traded

on bond markets

securities, papers

* vrijednosnice

Governments:

LONG-TERM BONDS:

GILTS – GB

TREASURY BONDS-USA

TREASURY NOTES-USA

SHORT-TERM BONDS:

TREASURY BILLS (3-MONTH)

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)• Who are market makers?Banks & b________ companies which q____ bid and offer price.• Bid vs. offer price?_____ – the highest price that the buyer is willing to pay

_____ – the price asked by sellers• What is a spread?D________ between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?I_____ r____ in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?I______ given by a bond. It depends on its c______ and its

purchase price.

dged

rokerage uote

Bid

Offer

ifference

nterest ate

ncome oupon

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-edged stock (UK)• Who are market makers?Banks & brokerage companies which quote bid and offer price.• Bid vs. offer price?Bid – the highest price that the buyer is willing to payOffer – the price asked by sellers• What is a spread?Difference between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?Interest rates in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?Income given by a bond. It depends on its coupon and its

purchase price.

Comprehension, MK p 82

1 F

2 T

3 T

4 F

5 T

6 F

7 F

8 F

Vocabulary, MK p 82

1 cash flow 2 equity

3 mutual funds 4 pension funds

5 principal 6 maturity

7 coupon 8 insolvent or bankrupt

9 creditors 10 dividends

11 market makers 12 bid / bid price

13 offer / offer price 14 yield

Match up verbs with nouns, 82

HW:The Financing of Corporate Activity, RB p77Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

Do exercises I, II & III

IV Read and match headings with paragraphs

The Financing of Corporate ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

Features of well-organized writing:

1. Text headings

2. Topic sentences

3. Paragraphing

4. Connectors

HW:

V RB, p 79 – Make notes on the text using the table on p 79

E.g. notes:

CORPORATE FINANCE• Full text: Generally speaking, ...... three

different ways... First, ..., Second, ..., For example, ...Third,...

• Notes:

THREE WAYS OF CORPORATE FINANCE: 1.2. .... (e.g. ... )3.