CSM 204 Chapter 15 LectureOutline of Previous LectureI. Why Corporations Issue Common StockII. Making Investment DecisionsIII. Why Investors Purchase StocksIV. Preferred StockV. Classification of StocksVI. Evaluating a StockVII. Numerical Measures for StocksVIII. Investment TheoriesIX. Buying and Selling StockX. Brokerage FirmsXI. Stock TransactionsXII. Investment StrategiesXIII. Advantage of Investing in Common StockXIV. Disadvantages of Investing in Common StockXV. Quiz 3-2Outline of Current LectureI. Corporate BondsII. Why Corporations Sell BondsIII. Types of Corporate BondsIV. Provisions for Bond RepaymentV. Why Investors buy Corporate BondsVI. Mechanics of a Bond TransactionVII. Federal Government BondsVIII. State and Local BondsIX. Decision to Buy or Sell BondsX. Advantages and Disadvantages of BondsXI. Quiz 3-3These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Current LectureChapter 15- Investing in BondsCorporate BondsWritten promise to pay with legal conditionsIndentureA bond is a promise by a company to repay the bond to the bondholderPublic DebtFace ValueMultiple of $1000Maturity DateInterest rate = coupon rateTrusteeThird personMakes sure the company pays the interestCollects the bonds from the bond owners and sends back the dealingsWhy Corporations Sell BondsTo get funds for major purchasesTo fund ongoing business activitiesWhen it is difficult to sell stockTo improve financial leverageInterest paid to bond holders is tax deductibleTypes of Corporate BondsDebenture bondUnsecuredNo collateral for that type of loanMortgage bondBond on propertySubordinated debenture bondA company had two different unsecure bond issuedPeople who bought the bond first get paid firstConvertible bondConvertible to common stock“When we take the company public, this bond is convertible to make common stock so that you can be an equity holder instead of just holding our debt.”High yield bondPaying a much higher interest rate than secure companiesProvisions for Bond RepaymentCall featureLets the issuer of the bond call your bond before it matures to pay the owner of the bond backSinking fundA savings account that a company uses to make sure that they can pay back the bonds at their maturitySerial redemptionOne bond issue with different maturity datesWhy investors buy corporate bondsInterest incomePaid semi-annually on most bondsRegistered bondsHave all your information on who has the bondsBearer bondsThe company does not know who owns the bondsZero coupon bondsDollar appreciation of bond valueBond repayment at maturityBond ladderingA strategy for buying bonds where I’m going to have some mature at the end of each yearMechanics of a Bond TransactionCan be held to maturity or sold in secondary marketMost are sold through brokerage outletsPurchased in primary or secondary marketsMultiples of $1000Smaller commissionsInterest and capital gains are taxableFederal Government BondsTreasury BillsMatures in 1 yr or lessTreasury Notes1-10 yearsTreasury Bonds10+Treasury Inflation-Protected Securities (TIPS)Federal agency issuesFannie Mae, Ginnie Mae, Freddie MacState and Local BondsMunicipal BondsTax advantagesPeople like to invest in projects close to homeGeneral obligation bondsRevenue bondsDecision to Buy or Sell BondsInternet InformationAnnual reportsBond ratingsYield calculationsAdvantages of BondsHigher interest rates than savings accountsSafe return of principalLess volatile than stocksRegular incomeDiversification of portfolioLow purchase priceEase of managementMunicipal bonds are tax freeDisadvantage of BondsInterest rate riskFace value volatilityNo hedge against inflationPrincipal does not appreciateDifficult to compoundQuiz 3-31. False2. True3. Treasury Bill4. Municipal Bond5. Zero Coupon