Ex.1 Read the text and underline the answers to the questions above

Companies finance most of their activities by way of internally generated cash flows. If they need to raise more money to expand their operations they can either issue new shares - selling them to their existing owners or on the stock market (equity finance) - or borrow money (debt finance), usually by issuing bonds. Companies generally use an investment bank to issue their bonds, and to find buyers, which are often institutional investors like insurance companies, mutual funds and pension funds.

Bondholders get back their original investment (or 'principal') on a fixed maturity date, and receive interest payments (the 'coupon') at regular intervals (six-monthly or annually) until then. Most bonds have fixed interest rates.

For investors, bonds are generally safer than stocks or shares, because if an insolvent or bankrupt company sells its assets, bondholders are among the creditors who might get some of their money back. On the other hand, in the medium or long term, shares generally pay a higher return than bonds. For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible: companies deduct their interest payments from their profits before paying tax, while dividends paid to shareholders come from already-taxed profits. But debt increases a company's financial risk: bond interest has to be paid, even in a year without any profits to deduct it from, and the principal has to be repaid when the debt matures, whereas companies are not obliged to pay dividends or repay share capital.

If tax revenue is insufficient, governments also issue bonds to raise money, and these are considered to be a risk-free investment. In the US there are Treasury notes (with a maturity of two to ten years) and Treasury bonds (with a maturity of ten to 30 years), while in Britain government bonds are known as gilt-edged stock or just gilts.

Bonds are saleable instruments that can be traded on the secondary bond market. Banks and brokerage companies act as market makers, quoting bid and offer prices for bonds with a very small spread or difference between them. The price of bonds varies inversely with interest rates. If interest rates rise, so that new borrowers have to pay a higher rate, existing bonds lose value. If interest rates fall, existing bonds paying a higher interest rate than the market rate increase in value. Consequently the yield of a bond - how much income it gives - depends on its purchase price as well as its coupon.

Ex.2 Are the following statements true or false?

1 Companies regularly finance their activities by issuing bonds.

2 Bond-issuing companies use investment banks to find investors.

3 Bonds are repaid at 100% when they mature, unless the borrower is insolvent.

4 Bondholders get their money back if a company goes bankrupt.

5 Bond coupons are generally lower than share dividends.

6 For profitable companies, there are tax advantages to issuing stocks or shares rather than bonds.

7 Governments systematically finance public spending by issuing bonds.

8 A bond paying 5% interest would lose in value if interest rates fell to 4%.

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Ex.4 Writing	\|	Vocabulary

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