Assignment#1
Sijia Duan 5264643 ECON3P03
Bond is a kind of financial contract, which is issued by the government, financial institutions, industrial and commercial enterprises directly to the society to borrow money, issued to the investors, at the same time promised to pay interest at a certain rate and repay the principal according to the agreed conditions. On the other side, a stock is a security issued by a stock company for the purpose of raising funds
…show more content…
Bond and stock both belong to negotiable securities, although both have their own characteristics. Bond and stock as a member of the securities system, which is a fictitious capital, they are no actual value, but they are the representatives of the real capital. Holding bond and stock are likely to obtain revenues. Also, bond and stock are the means of financing, compared with indirect financing such as bank loans, issuance of bonds and stock financing are large, long-term, low-cost, and not subject to the conditions of the lending bank. But, the mutual effect of yield from a single bond and stock, their yields are often differences and sometimes there such a big gap. However, if the market is effective, the average interest rate of the bond and the average return rate of the stock will generally remain relatively stable relationship, the difference reflects the degree of risk difference between the two. Looking with dynamic, the rate of return of the stock and prices and bond’s interest rates and prices are affect each other, often in the securities market with the movement in the same direction, for example, when the stock goes up then the bond will be going up too, but not exactly same range. These are the relationship between stock and …show more content…
First, issuing body is different, as a means of financing, whether the country, local public group and enterprises can issue bonds but stock can only be issued by a joint-equity enterprises. Second, the stability of earning is different. From the proceeds, the bond’s interest rate are fixed before the purchase, and the fixed interest rate can be obtained at maturity regardless of whether the company issuing the bonds is profitable or not. On the other hand, stock won’t have a fixed dividend yield before the purchase, the dividend income follow with the profitability of the stock company to changes. Third, bond can take back the principal at maturity, also people can get both the principal and interest in the maturity date. But, stock has no expiration date, once the principal of the stock is giving to the company, it can not be recovered. And also, the risk is different. Bond is only the general investment object, the turnover rate of the transaction is lower than the stock, however, the stock is not only an investment object, it is the main investment object in the financial market, the turnover rate of transaction is high even it has low security and high risk, but will obtained a high expected income, which also attracting a lot of
Also, the usage of high yield bonds securities for financing became popular during the 1990s in foreign markets such as Latin America, Asia, and Europe showing the rise in international appeal for these kinds of securities. However, outside of the U.S the high yield market has taken a longer time to become popular and thus there is still room for the development of high yield bonds within financial markets in emerging countries. It is safe to determine that the market for high-yield bonds will always be in existence since it is a viable alternative for many fast growing firms to acquire financing and is a rewarding option for investors. The key to the still growing, strong market demand for high yield bonds is based on linking the [U.S.] economy’s constant desire for capital with investors’ desire for higher returns on their investment.
Equity capital represents money put up and owned by shareholders. This money can be used to fund projects and other opportunities under the auspice of creating greater value. This type of capital is typically the most expensive. In order to attract investors, the firms expected returns must consummate with the associated risk ("Financial leverage and,"). To illustrate this, consider a speculative oil drilling operation, this type of operation would require higher promised returns than say a Wal-Mart in order to attract investors. The two primary forms of equity capital are 1) money invested into the business for an ownership stake (i.e. stock) and 2) retained earnings from past profits used to fund future growth through acquisitions, expansions and product development.
A collateral bond is backed by an asset, usually common stock, that adds security and reduces the risk of the bond to the bondholder. If the bond has collateral, the risk of the bond is less so the coupon rate will likely be lower because the bondholder is receiving extra for the added security. If the bond doesn’t have collateral, the risk is greater for the bondholder, so S&S will pay a higher coupon rate to make up for the higher risk. Adding collateral to a bond makes the bond more attractive to bondholders and would it make it easier for S&S Air to sell the bonds but it would also mean that S&S would have to invest more into the bonds they were issuing.
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
What is a bond? Bonds are often considered by investors to be “financial IOU's.” Frequently, bonds are issued from banks designed for quick, upfront cash used in lending purposes, such as loans. When purchasing a bond, the buyer pays an upfront sum of money to the seller. By the terms and conditions...
From that perspective, if our model’s rates were lower than Deutsche Bank’s rates, the bond was underpriced in the market; therefore we would recommend buying the bond. This would allow investors to buy at a bargain since they would be paying less than what the bond is actually worth. Based on our results, we recommend that investors purchase the bonds with the maturities of three through nine years and the bond with a maturity of fifteen years. All of these bonds are underpriced in the market and should be purchased to take advantage of the arbitrage opportunities. We also recommend that investors should sell the bonds with maturities of one, twenty, and twenty-five years because their prices were greater than Deutsche Bank’s prices, thus making them overpriced in the market. The bonds with a two-year and ten-year maturities are, by design, equally priced between the two methods, so, nothing should be done with them. These are the findings that our group compiled and further information on our methodology, results, and recommendations will be provided in the paragraphs
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
The two primary ways in which capital is transferred between savers and borrowers are by direct transfer of money and securities and through a financial intermediary. Talking about direct transfer, companies sell their stocks or bonds directly to the investor which is the savers we are talking over here. Main thing of direct transfer is that the companies will straight away head for the investors, throughout the process, none of the financial intermediary will involve in this business. This business is purely between the firm (Borrowers) and the investors (Savers). So how does direct transfer work between the savers and borrowers? The firm (Borrowers) sell their stocks and bonds to investors (Savers) in order to create a gain in money for example expanding purposes. It refers to the firm is borrowing money from the investor by selling them stocks or bonds for many wide range of purposes. A bond is functioned like a loan between investor and firm. The investor agreed to give a certain amount of amount of money for period of time into exchange for time to time interest payments. When the investor loan reaches the maturity date, thus the loan is given back.
A stock is a share of a public corporation that is traded in the open market. It is how a corporation raises its’ capital to expand their business and ability to produce goods or services. There are two types of stock: common and preferred stocks. The difference is how an investor receives a dividend. Both stocks give a person a piece of ownership of a corporation with the hope that there is a return on their investment.
Bonds have a number of characteristics that differentiate one issue from another. We are going to define and describe a number of characteristics in detail below.
their financial future. Different types of investments are investigated and bonds are one of the
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
By interviewing four of my friends about their knowledge about finances and what does finance mean to them and how to improve it. The people that I had interviewed student, workers, parents and store owner. I had asked my friend Nawal who is a science major at Brought of Manhattan community college and he said that:
Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance.