C10 (1)

• Nominal value

  Amount issuer agree to pay shareholder at maturity date
• Coupon rate

  interest rate bondholders receive
• Terms of maturity

  number of years issuer pay back principal to bondholders
• yield-to-maturity

  compunded rate of return for bond holders
• Call provison

  entitle issuer redeem/call bonds from holders
• sinking fund

  money put aside by issuer for repayment of debt
• restrictive covenants

  issue bonds will subject more restrictions
• What are bonds?

  long term debt, borrower(issuer) make payments on interest (coupon)and principal on specific dates to bond holders(lenders of fund).

  Issued to finance a particular project.
• Advantages of bonds to issuer

  Interest payment is tax deductible

  earning per share for shareholders increase. Surplus earning available to shareholders during good times higher

  shareholder maintain control of firm. Bond holders have no controlling rights
• Disadvantages bonds to issuer

  debt, interest charge must be paid.

  increased risk due to financial leverage, debt ratio higher. Bonds, long term debts increase financial leverage.

  Restrictions on issuing firm, issue bonds more restrictions. Bond holders have restrictions.
• Advantages of bonds to investors

  fixed returns, fixed interest income. Fixed-income security, stable return, fixed interest payment.

  lower risk, Bond holders have prior claim before shareholders.
• Disadvantages of bonds to investor

  fixed interest payment. Bond holders don’t have additional earnings.

  decline in real interest payment. fixed interest payment lose out during times of high inflation. Real return lower with high inflation.

  lower return, lower risk.

  reinvestment risk on callable bonds. Money received reinvested not very high.
• Government bond

  issued by government in local currency. No risk. Malaysian Government Securities (MGS)
• convertible bonds. Convertible into common stocks at fixed price, optional. lower coupon rate, capital gain chances.
• zero coupon bonds pays no annual interest, sold at discount, capital appreciation to investors.
• junk bonds, low quality bonds.
• Bond ratings

  grades assigned to bonds, higher rating investment grade. Lower ratings junk category, assume more risk, compensated with higher yield.