FINAL - chapter 4 - bonds

Question 1

what is a bond?

Answer 1

a security a company issues, that people can buy
buying a bond, they give the issuer a loan, that the issuer has to pay in full when the bond matures, as well as interest on the bond, over the years before the maturity date

Question 2

advantages of bonds over stock

Answer 2

issuer does NOT have to issue dividends
creditors do not elect board of directors

Question 3

disadvantages of bond financing

Answer 3

company can fail to profit from the investment, fail to pay the debt of the bond, and have to declare bankruptcy

Question 4

secured bonds

Answer 4

give creditors a pledge of certain assets from the business (payment of the debt is guaranteed)

Question 5

unsecured bonds

Answer 5

issued based on company’s credit rating
(riskier than secured bonds)

Question 6

face interest rate

Answer 6

the rate of annual interest, paid to creditors, expressed as a percentage of the face value of the bond

Question 7

market interest rate

Answer 7

the rate of the interest paid in the market on bonds of similar risk

Question 8

discount/premium bonds

Answer 8

discount - face value interest rate is lower than market price

premium - face value interest rate is higher than market price