Debt Flashcards
Bonds
Bonds are an instrument of indebtedness
They are usually issues by governments or large companies
The feature of bonds
They tend to be standardized
The face value is usually 100
There is a standard return called coupon
They expire at the same time
What’s the benefit of standardization
Standardization allows them to be traded. Being able to trade bonds allow lenders to manage their risks to any one borrower
What bond is known as
Bonds are know as liabilities,will alter the accounting equation
And means that the borrower has the obligation to repay the money
The change of accounting equation
Even though the value of assets in the business increase the value of the business to the owner remains the same
Corporate bonds(categories)
Investment grade
Below investment grade
Investment grade
Sufficiently Security for large investment funds to buy without risk of serious loss of capital
Below investment grade
Risk is higher and only suitable for investors well educated in the risk
Government bonds ‘purpose
Government makes bonds to make up for budget deficit
This is where government spends more than it collects in revenue to pay for specific program
How will the government repay the bonds?
They will be repaid using future tax receipts.
Of course ,government don’t have to use future tax receipts to repay loans because they also have the power to create their own money
This is known as borrow from central banks and printing money
2 situations Government budget
Government spending Expense Taxation Income 1.income >expense Suspense 2 expenses >income Deficit
Cash flow
The money a company receives minus the money it spends during a certain period
Mutual fund
Funds operated by investment companies that invest people’s in various assets
Principal
The amount of capital making up a bond or other loan
Maturity
The length of time for which a bond is issued (until it is repaid)
