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dexazuxo's version from 2017-05-13 09:40


Question Answer
Why should a firm raise capital via issuing bonds?1. No dilution of ownership and future profits
2. Quicker, easier, less expensive that equities
Company will have commitments to onerous loan covenants
Risk of bankruptcy if unable to pay interest to bondholders.
Difference between clean and dirty price of a bondClean price: The price of the bond ignoring any interest that may have accrued since the last coupon payment
Dirty price: The price of the bond including any interest that may have accrued since the last coupon payment.
Key: Most official prices for bonds are quoted as clean. Actual sales in bonds are transacted as dirty.
What are the 2 ways to value equities? Relative and absolute.
What are the main drivers of bond prices? 1. If there is a rise or fall in interest rates, will cut or raise bond price. If market rates rise, then lenders can receive the same coupon payment for a lower capital outlay on a new bond
2. If market rates are higher or lower than the coupon rate, the bond price will be lower or higher than par value. EG. if market interest rates are higher than par value, then lenders need to provide a lower capital outlay to receive same coupon payment.
3. Increased length of time in maturity will increase sensitivity of the bond to changes in market interest rates.
4. perceptions of bond default risk: Economic cycle, firm/government events
5. Interest rate expectations: inflation, monetary growth, government borrowing
What is a bond?Financial security in which the issuer promises to make inter and principle payments to the holder.