Notes

unit 7 lesson 4
Broker - An individual or firm that charges a fee or commission for executing buy and sell orders for stocks and bonds submitted by another individual or firm.
•Par Value - The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.
•Coupon - The dollar amount of interest earned on a bond.
•A bond's face value, or price when issued, is known as its par value. This is the amount that will be repaid.
•The bond's maturity is when the loan is due. It varies from 13 weeks to 30 years or more. The length of time to maturity is called the term.
•The dollar amount of interest that the issuer agrees to pay each year is known as the coupon.

Alternative Options

-Zero-coupon bond
Zero-coupon bond does not make periodic interest payments. Instead, the bondholder buys the bond at a much lower price than its face value, and the interest is gained at maturity.

-Floating-rate bond
Floating-rate bond has an interest rate that adjusts periodically with market changes, and may allow either the bondholder or issuer to change the maturity date.

-Callable bond
Callable bond entitles the issuer to pay off the principal before the maturity date.

-Putable bond
Putable bond entitles the bondholder to ask for repayment before the maturity date.

-Convertible bond
Convertible bond gives the bondholder the right to exchange the bond for shares of the issuer's common stock.

math

•$10,000 face value
•98 Quoted price
•8% interest

Cost of bond is $10,000 x .98 = $9800
FACE VALUE X QUOTED PRICE=BOND COST

Annual interest is $10,000 x .08 = $800
FACE VALUE X INTEREST RATE = ANNUAL INTEREST

Annual yield is $800 / $9800 = 8.2%
ANNUAL INTEREST / BOND COST = ANNUAL YIELD

In other words, you could buy this bond for $9800 and earn interest of $800 a year, which is a yield of over 8%. Plus, when the bond matures, you would be paid $10,000.

Most new bonds are issued through an investment bank, also known as the "underwriter." The bond issuer pays the sales fee. Most financial advisors suggest buying these new issues when investing in bonds, rather than buying older bonds that are traded by brokers on what is known as the "secondary market." The fees will be significantly higher on the secondary market, and you know from mutual funds that the more you pay in fees, the less you can make overall.