Financial Management II

1. Bonds and Their
Characteristics
Financial Management 2
K. V. Mendoza, MBA

2. Bonds and Their Key
Characteristics
What is Bond?
Who Issue Bonds?
Key Characteristics of
Bonds

3. What is a Bond?
A bond is a long-term contract under
which a borrower agrees to make
payments of interest and principal on
specific dates to the holders of the
bond.

4. Who Issue Bonds?
Corporation
s
Governmen
t Agencies

5. How Bonds Work?
For example, on January 3, 2009,
Allied Food Products borrowed
$50 million by issuing $50 million
of bonds. For convenience, we
assume that:

6. How Bonds Work?
In any event, Allied received
the $50 million; and in
exchange, it promised to
make annual interest
payments and to repay the
$50 million on a specified
maturity date.

7. How Bonds Work?
Allied sold 50,000 individual
bonds for $1,000 each.
Actually, it could have sold one
$50 million bond, 10 bonds each
with a $5 million face value, or
any other combination that
totalled $50 million.

8. Classification of Bonds
Treasury Bonds-generally
called Treasuries and
sometimes referred to as
government bonds, are
issued by the government.

9. Classification of Bonds
Corporate Bonds-are
issued by business firms.
unlike Treasuries,
corporates’ are exposed to
default risk.

10. Classification of Bonds
Municipal Bonds-or munis,
is the term given to bonds
issued by state and local
governments.

11. Classification of Bonds
Foreign Bonds-are
issued by a foreign
government or a foreign
corporation.

12. Key Characteristics of Bonds
Par
value- is
the stated
face value
of the
bond

13. Key Characteristics of Bonds
Coupon
Payment- is
the specified
number of
dollars of
interest paid
each year.

14. Key Characteristics of Bonds
Coupon
Interest
Payment- the
stated annual
interest rate
on a bond.

15. Key Characteristics of Bonds
Fixed Rate
Bond- a
bond whose
interest rate
is fixed for
its entire life

16. Key Characteristics of Bonds
Floating Rate
Bond- A bond
whose interest
rate fluctuates
with shifts in the
general level of
interest rates.

17. Key Characteristics of Bonds
Zero Coupon- A bond
that pays no annual
interest but is sold at a
discount below par,
thus compensating
investors in the form of
capital appreciation

18. Key Characteristics of Bonds
Maturity
Date- a
specified date
on which the
par value of a
bond must be
repaid

19. Key Characteristics of Bonds
Call Provision-a
provision in a
bond contract
that gives the
issuer the right to
redeem the
bonds under
specified terms
prior to the
normal maturity
date.
@10Year Bond, 10%
annual coupon
Par Value = $ 1,000
Call Premium = $ 100
Payment = $ 1,100

20. Key Characteristics of Bonds
Sinking
Fund
Provision- a
provision in a
bond contract
that requires the
issuer to retire a
portion of the
bond issue each
year

21. Key Characteristics of Bonds
 Convertible
Bond- bond that is
exchangeable at the
option of the holder for
the issuing firm’s
common stock

22. Key Characteristics of Bonds
Warrant- a long-term
option to buy a
stated number of
shares of common
stock at a specified
price

23. Key Characteristics of Bonds
Putable Bond- a
bond with a provision
that allows its
investors to sell it
back to the company
prior to maturity at a
rearranged price.

24. Key Characteristics of Bonds
Income Bond
– a bond that pays
interest only if it is
earned

25. Key Characteristics of Bonds
 Index
(Purchasing
Power) Bond –
A bond that has
interest payments
based on an
inflation index so as
to protect the holder
from inflation

26. end of lecture
Just as the rich rule the poor, so the
borrower is servant to the lender.
Proverbs 22:7