Listening
A). Listen to the text and complete the sentences with the necessary word combinations from the list.
a call provision
callable bonds
capital structure
corporate indentures
coupon rate
debt load
investment opportunities.
reduce the bond's interest rate
taking out a loan
the appreciation of a bond's price
the call price
the covenants
the sinking fund
to expand its storage facilities
to retire a bond issue
Call provisions
Most ________include________, which states that the issuer has the right to force the holder to sell the bond back. The call provision usually requires a waiting period between the time the bond is initially issued and the time when it can be called. The price bondholders are paid for the bond is usually set at the bond's par price or slightly higher (usually by one year's interest cost). For example, a 10% ________$1000 bond may have a call price of $1100.
If interest rates fall, the price of the bond will rise. If rates fall enough, the price will rise above_______, and the firm will call the bond. Because call provisions put a limit on the amount that bondholders can earn from ____________________investors do not like call provisions.
A second reason that issuers of bonds include call provisions is to make it possible for them ________their bonds according to the terms of________. A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year. This provision is attractive to bondholders because it reduces the probability of default when the issue matures. Because a sinking fund provision makes the issue more attractive, the firm can_____________.
A third reason firms usually issue only __________is that firms may have _____________of the issue restrict the firm from some activity that it feels is in the best interest of stockholders. Suppose that a firm needed to borrow additional funds___________. If the firm's bonds carried a restriction against adding debt, the firm would have to retire its existing bonds before issuing new bonds or __________to build the new warehouse.
Finally, a firm may choose to call bonds if it wishes to alter its_______. A maturing firm with excess cash flow may wish to reduce its _________if few attractive _________are available.
Because bondholders do not generally like call provisions, callable bonds must have a higher yield than comparable non callable bonds. Despite the higher cost, firms still typically issue callable bonds because of the flexibility this feature provides the firm.
B). Now listen again, and answer the questions.
What does call provision state?
What are the reasons that issuers of bonds include call provisions?
What is a sinking fund?
Why do firms still typically issue callable bonds?
C). Explain the following word combinations.
a call provision
the call price
the sinking fund
covenants
to retire a bond issue
callable bonds
TERMS FOR TEXT
Bearer bond - a fixed-income instrument that is owned by whoever is holding it, rather than having a registered owner.
Capital structure - the distribution of a firm's capital between debt and equity
Callable bond – a bond, which issue has the right to redeem prior to its maturity date, under certain conditions.
Collateral - assets pledged as security for a loan
Corporate bond - a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.
Coupon - the contractual interest obligation a bond or debenture issuer covenants to pay to its debt holders. The interest paid on a bond. That is, the coupon is the amount that the issuer must pay to the holder of each bond in exchange for investing in that bond.
Covenant - a clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made. Essentially, covenants spell out what the borrower may do and must do in order to satisfy the terms of the loan. Debentures - are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer
Equipment trust certificates - are bonds secured by tangible non-real-estate property, such as heavy equipment or airplanes.
Futures - involve a financial contract that requires the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a specific price on a predetermined date in the future.
General obligation bond - usually refers to government bonds and are backed by the full faith and credit of the taxing power (country, municipality, etc.) that issues them.
Indenture - the contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenants.
Interest payment - the charge for the privilege of borrowing money, typically expressed as an annual percentage rate. The amount of ownership a stockholder has in a company, usually expressed as a percentage.
Investment funds - money that is invested with an expectation of profit
Investments - the act of investing money, b. the amount invested, c. an enterprise, asset, etc., in which money is or can be invested 2. a. the act of investing effort, resources, etc. b. the amount invested
Issuer - an organization that registers, distributes, and sells a security on the primary market. An issuer can be a private company or a government.
Junk bond – a bond with a low rating. They have higher yields because they have a higher risk of default on the part of the issuer. High-yield bonds are considered sufficiently high-risk that the law does not allow banks to invest in them.
Mortgage bond - a long-term bond secured by the payments on one or more mortgages.
Municipal bond - are securities issued by local, county, and state governments
Option - a contract in which the writer (seller) promises that the contract buyer has the right, but not the obligation, to buy or sell a certain security at a certain price (the strike price) on or before a certain expiration date, or exercise date.
Registered bond – a bond whose issuer records ownership and interest payments
Revenue bond – a bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed.
Secured bond – is the one with collateral attached.
The bond indenture - the contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenants
The book entry method – the method where the security certificate is not actually given to the holder. Instead, the holder is given a receipt and the information is held electronically. Book-entry securities have become more common as computers become more sophisticated and exchanges increasingly decide to close their trading floors.
Treasury bonds – a debt security backed by the full faith and credit of the United States government with a maturity of more than 10 years. They may be purchased directly from the government or from a bank; they have coupon payments payable every six months.
Treasury notes - a debt security backed by the full faith and credit of the United States government with a maturity between one and 10 years. They may be purchased directly from the government or from a bank; they have coupon payments payable every six months.
Unsecured bond – a debt security, issued by a government or large company, that is not secured by an asset or lien, but rather by the all issuer's assets not otherwise secured.