5. Bonds and stocks

bond

debt issued by a corporation or a government body. Represents a loan made by investors to the issuer, in return for his/her money, the investor receives a legal claim on future cash flows of the borrower

par value (debt); face value

principal amount that the issuer is obligated to repay at maturity

coupon payments

interest payments on a bond

registered bonds

bonds issued in the United States; the issuer knows the names of the bondholders and the interest payments are sent directly to the bondholder

bearer bonds

have coupons that are “clipped” and presented, like a check, to the bank for payment; the bond issuer does not know who is receiving the interest payments

Discount bond

c < r, PV < F

Premium bond

c > r, PV > F

Par bond

c = r, PV = F

Stocks

legal representation of ownership in a corporation (entity). A stock holder is entitled to receive profit distributions of the corporation ( dividends)

Dividends

cash payments made by the corporation to stockholders. Since stocks have to expiration date, we assume that dividends will be paid forever

valuation

the value of stocks at any point in time equals the present value of all dividends

junk bonds (high-yield bonds)

bonds with ratings that are below investment grade; that is, rated Ba1, BB+, or lower

Eurodollar bonds

dollar denominated bonds sold outside the United States

Yankee bonds

dollar-denominated bonds issued in the United States by a foreign issuer

global bonds

bonds that are generally denominated in U.S. dollars and marketed globally

debenture bonds

unsecured obligations that depend on the general credit strength of the corporation for their security

zero-coupon bond

has no coupon payments; its only cash return to the investor is payment of the bond’s principal, or par value, at maturity

preferred stock

equity security that has preference, or a senior claim, to the fi rm’s earnings and assets over common stock

intrinsic value

the maximum price we should be willing to pay for an asset;

credit risk (default risk)

the chance of nonpayment or delayed payment of interest or principal

perpetuity

A security that pays a constant periodic cash fl ow as long as the issuer exists. It can be considered to be an “infi nite annuity.”