This homework for Adrian Monroe so please do not send me MSG

CHAPTER OVERVIEW

LEARNING OBJECTIVES

CHAPTER SUMMARY

Obj. 1

Describe the characteristics of corporate bonds.

A corporate bond is a corporation’s written pledge to repay a specified amount of money, with interest. All of the details about a bond (face value, interest rate, maturity, repayment, etc.) are contained in the bond indenture. The trustee is the bondholder’s representative.

Obj. 2

Discuss why corporations issue bonds.

Corporations issue bonds and other securities to pay for major purchases and help finance their ongoing activities. Firms also issue bonds when it is difficult or impossible to sell stock and to improve a corporation’s financial leverage. Bonds may be debentures, mortgage bonds, subordinated debentures, convertible bonds, or high-yield (junk) bonds. Most bonds are callable. A call provision can be used to buy back bonds before the maturity date. To ensure the money will be available when needed to repay bonds, many corporations establish a sinking bond. Corporations can also issue serial bonds that mature on different dates.

Obj. 3

Explain why investors purchase corporate bonds.

Investors purchase corporate bonds for three reasons: (1) interest income, (2) possible increase in value, and (3) repayment at maturity. They are also an excellent way use asset allocation to diversify your investment portfolio. The method used to pay bondholders their interest depends on whether they own registered bonds, registered coupon bonds, bearer bonds, or zero-coupon bonds. Because bonds can increase or decrease in value, it is possible to purchase a bond at a discount and hold the bond until it appreciates in value. Changes in overall interest rates in the economy and changes in the financial condition of the corporation are the primary causes of most bond price fluctuations. You can lose money on a bond investment if your bond decreases in value. You can also choose to hold the bond until maturity and the corporation will repay the face value of the bond. Corporate bonds are sold by full-service and discount

LEARNING OBJECTIVES

CHAPTER SUMMARY

brokerage firms and online.

Obj. 4

Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bonds issued by the U.S. Treasury and federal agencies are used to finance the national debt and the ongoing activities of the federal government. Currently, the U.S. Treasury issues five principal types of bonds and securities: Treasury bills, Treasury notes, Treasury bonds, Treasury Inflation-Protected Securities (TIPS), and savings bonds. State and local governments also issue bonds to finance their ongoing activities and special projects such as airports, schools, toll roads, and toll bridges. U.S. Treasury securities can be purchased through Treasury Direct, brokerage firms, and other financial institutions. Municipal bonds are generally sold through the government entity that issued them or account executives. One of the most important features of municipal bonds is that interest on them may be exempt from federal taxes.

Obj. 5

Evaluate bonds when making an investment.

Today it is possible to trade bonds online and obtain research information via the Internet. Some local newspapers and The Wall Street Journal and Barron’s provide bond investors with information needed to evaluate a bond issue. Detailed financial information can also be obtained by requesting a printed copy of the corporation’s annual report or accessing its Website. To determine the quality of a bond issue, most investors study the ratings provided by Standard & Poor’s, Moodys, and Fitch Bond Ratings. Investors can also calculate a current yield and the yield to maturity to evaluate a decision to buy or sell bond issues.

The current yield is determined by dividing the annual income amount by its current market value. The yield to maturity takes into account the relationship among a bond’s maturity value, the time to maturity, the current price, and the dollar amount of interest.