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/ i n a n c i a I t n g I i s h    O company f i n a n c e

Bonds

EXERCISE 1

Match the responses on the right with the questions on the left:

1.    So what exactly are bonds?

2.    And how do thcy work?

3.    So you have to keep them for a long time?

4.    Why should that happen ?

5.    Oh, l see. Is that what thcy mean by below par?

6.    But the hond's interest ratę doesn’t change?

7.    How*s that?

8.    And people talk about AAA and AAB bonds, and things like that.

9.    And what about gilts?

10.    Not Treasury Bills?

11.    And James Bond?

a.    Because of changes in interest rates. For example, no-one will pay the fuli price for a 6% hond if new bonds are paying 10%.

b.    Exactly. And the opposite, a hond whose market va\ue '» higher than its face value, is above par.

c.    I knew you’d finish by saying that!

d.    No, not at all. Bonds are very liquid. They can be sold on the secondary market until they maturę. But of course, the price might have changed.

e.    No, not unless its a floating ratę Kmd. The coupon, the amount of interest a hond pays, remains the same. But the yield will change.

f.    No, those are short-term (three-month) instruments which the govemment sells to and buys from the commercial banks, to regulate the money supply.

g.    That s the name they use in Britain for long-term govemment Kmds - gilts or gilt-edged securities. In the States they cali them Treasury Bonds.

h.    They’re securities issued by companies, govemments and financial institutions when they need to borrow money.

i.    Weil, a Kmds yield is its coupon payment expressed as a percentage of its price on the secondary market, so the yield changes if you buy or sell above or below par.

j.    Weil, they usually pay a fixed ratę of interest and are repaid after a fixed period, known as their maturity, for example five, seven, or ten years.

k.    Yes. Bond-issuing companies are given an investment grade by private ratings companies such as Standard & Ptx>rs, according to their financial situation and performance.

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EXERCISE 2

Complete the following:

1.    Ctłmpanies generally use investment Kinks to..........their Kmds.

2.    Thereafter, they can be traded on the...........market.

3.    The amount of interest a K>nd pays is often called its......

4.    The majority of Kmds have a..........ratę of interest.

5.    A Kmds..........depends on the price it was Kmght at.

6.    A Kmd priced at 104% is described as being...........

7.    Bonds are repaid at 100% at...........

8.    AAA is the highest...........

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