Bonds

h Govcrnment and rorporate brndsBonds are loans to local and national governments and to large companies. The holdersof bonds generally receive fixed interest payments, once or fwice a year' and get theirmoney

- known as the principal - back on a given maturity date. This is the date when

the loan ends.Governments issue bonds to raise money and they are considered to be a risk-freeinvestment. In Britain government bonds are known as gilt-edged stock or just gilts. Inthe US they are called Treasury notes, which have a maturity of 2-10 years' and Tieasurybonds, which have a maturity of 10-30 years. (There are also short-term Treasury billswhich have a different function: see Units 25 and 27.)Companies issue bonds, called corporate bonds, because they can usually pay less interestto bondholders than they would have to pay if they raised the same money by a bankloan. These bonds are generally safer than shares, because if a company cannot repay itsdebts it can be declared bankrupt. If this happens, the creditors can force the company tostop doing business, and sell its assets to repay them. In this way, bondholders willprobably get some of their money back.Borrowers

- the companies issuing bonds - are given credit ratings by credit agencies such

as Standard & Poor{ and Moody's. This means that they are graded, or rated' accordingto their ability ro repay the loan to the bondholders. The highest grade (AAA or Aaa)means that there is almost no risk that the borrower will default - fail to pay interest orto repay the principal. Lower grades (e.g. Baa, BBB, C, etc.) mean an increasing risk ofthe borrowei becoming insolvent - unable to pay interest or repay the capital'

re Prices and yieldsBonds are traded by banks which act as market makers for their customers' quoting bidand offer prices with a very small spread or difference befween them. (See Unit 30) Theprice of bnds varies inversely with interest rates. This means that if interest rates rise' sothat new borrowers have to pay a higher rate, existing bonds lose value' If interest ratesfall, existing bonds paying a higher interest rate than the market rate increase in value.Consequenily the yield of a bond - how much income it gives - depends on its purchaseprice ai well as its coupon or interest rate. There are also floating-rate notes - bondswhose interest rate varies with market interest rates.

re thnr typts af bonds!7hen interest rates are high, some companies issue convertible shares or convertibles'which are bonds that the owner can later change into shares. Convertibles pay lowerinterest rates than ordinary bonds, because the buyer gets the chance of making a profitwith the convertible oPtion'There are also zero coupon bonds that pay no interest but are sold at a big discount ontheir par value, which is 100%, and repaid at 100o/o at maturity. Because they pay nointert, their owners don't receive money every year (and so don't have to decide how toreinvest it); instead they make a capital gain at maturity'Bonds with a low credit rating (and a high chance of default), but paying a high interestrate. are called iunk bonds. Some of these are known as fallen angels - bonds ofcompanies that were previously in a good financial situation, while others are issued tofinance leveraged buyouts. (See Unit 40)

BrE: convertible share; AmE: convertible bond

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33. 1 Match the words in the box with the definitions below. Look at A and B opposite to help you.

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couPon maturity datecredit rating principalgilt-edged stock Treasury bondsdefault Teasury notesinsolvenr yield1 the amount of capital making up a loan2 an estimation of a borrower,s ,olu.rr.y or ability to pay debts3 bonds issued by the British governmenr4 non-payment of interest or loan at the scheduled time5 the day when a bond has to be reoaidG long-term bonds issued by the American governmenr7 the amount of interest that a bond DaysB medium-term (2-10 year) bonds issue by the American government9 the rate of income an investor receives fr^ ur.;;;;;"10 unable to pay debts

rl 2 -\re the following statements true or false? Find reasons for your answers in A, B and c opposite.I Bonds are repaid at 100o/o when they mature, unless the borrower is insolvent.2 Bondholders are guaranteed to g., nil ,h.i,

-;;;L;.k ii".o-pu'y goes bankrupt.3 AAA bonds are a very safe investment.4 A. bond payils 5olo interest would gain in value if interest rates rose to 6u/o.5 The price of floating-rare nores do.-sn't vary very

-;.;;L;.u"se they always pay marketrnterest rates.6 The owners of convertibles have to change them into shares.7 some bonds do not pay interest, but are repaid at above their selring price.8 funk bonds have a high credit rating, and a ,"lutiu.ly ro* .hurr.. of default.

3l 3 -\nswer the questions. Look at A, B and C opposite to help you.1 \X/hich is the safest for an invesror?

A a corporate bond B a junk bond C a government bond2 \X/hich is the cheapest way for a company to raise money?A a bank loan B an ordinaiy bond- - d I convertible3 \X/hich gives the highest potential rerurn to an investor?A a corporate bond B a junk bond C a government bonda \x/hich is the most profitable for an investor if interest rates 'se?A a Treasury bond B a floating-rate note - u 1-.."r,rry note

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