Can you explain what bonds are - to an adult rather than a six-year-old? If not, listen to Richard Mahoney, a Vice-President with J.P. Morgan and Co. in New York.

T 3 Listen to the interview, and answer the following questions.

1. What is the difference between bonds and stocks, in terms of income and repayment?

2. What are the three types of investor clients mentioned?

3. Mahoney gives examples of types of investments that generally carry very low, moderate, and higher risk. What are they?

Match the words and phrases.

1 investors	A the amount of a loan
2 issuing bonds	В borrowing money
3 principal	С date at which the money will be returned
4 maturity	D fall in interest rates
5 pension funds	E keep their bonds till maturity
6 buy-and-hold investors	F default
7 non-payment	G profits on the sale of assets
8 price appreciation	H providers of funds
9 price depreciation	I retirement money
10 capital gains	Jrise in interest rates

 

Discuss the following questions.

1. What do you expect to happen to interest rates in your country (or continent) in the foreseeable future, and why?

2. Could you explain bond dealing to a child better than Sherman McCoy? If you work in business and have children, you might easily find yourself in the same situation as Tom Wolfe's character one day. How would you explain the following jobs to a six-year-old?

 

· bond dealer	· trade union organizer
· personnel manager	· internal auditor
· stockbroker	· market researcher

 

Read the text below and answer the following questions.

1. Why do most companies use a mixture of debt and equity financing?

2. Why do governments issue bonds?

Bonds

Companies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. More and more companies now issue their own bonds rather than borrow from banks, because this is often cheaper: the market may be a better judge of the firm's creditworthiness than a bank, i.e. it may lend money at a lower interest rate. This is evidently not a good thing for the banks, which now have to lend large amounts of money to borrowers that are much less secure than blue chip companies.

Bond-issuing companies are rated by private ratings companies such as Moody's and Standard & Poors, and given an 'investment grade' according to their financial situation and performance, AM being the best, and С the worst, i.e. nearly bankrupt. Obviously, higher the rating, the lower the interest rate at which a company can borrow.

Most bonds are bearer certificates, so after being issued (on the primary market), they can be traded on the secondary bond market until they mature. Bonds are therefore liquid, although of course their price on the secondary market fluctuates according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bond's yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a percentage of its price on secondary market.

For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. Apart from this 'tax shield', it is generally considered to be a sign of good health and anticipated higher future profits if a company borrows. On the other hand, increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures whereas companies are not obliged to pay dividends or repay share capital. Thus, companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors.

Governments, of course, unlike companies, do not have the option of issuing equities. Consequently they issue bonds when public spending exceeds receipts from income tax, VAT, and so on. Long-term government bonds are known as gilt-edged securities, or simply gilts, in Britain, and Treasury Bonds in the US. The British and American central banks also sell and buy short-term (three month) Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation; to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way.

Vocabulary

above par	выше паритета; выше номинала
appreciate	повышаться в цене
bearer certificate	сертификат на предъявителя
below par	ниже паритета; ниже номинала
bonds	облигации
buy-and-hold investors	инвесторы по принципу «купи - держи»
capital gains	доходы от прироста капитала
convertible bond	конвертируемая облигация
coupon	отрезной талон у ценных бумаг на получение дохода, процентов с них; доход по ценным бумагам, фиксированный процент
deal	сделка, соглашение, договор
debt financing	финансирование путем получения новых займов
debt-equity ratio	отношение задолженности к собственному капиталу
default	неплатёж, дефолт
depreciate	обесцениваться
equity financing	собственное капитальное финансирование
floating rate note	долговое обязательство с плавающей ставкой
gilt-edged securities or tax gilts	гарантированные (государственные) ценные бумаги
income tax	подоходный налог
investment grade	категория капиталовложений (рейтинг доходности облигаций)
issue bonds	выпускать облигации
junk bond	бросовая облигация (облигация с низким спекулятивным уровнем кредитоспособности, обычно приносящая более высокий доход)
liquid	ликвидный, легко реализуемый
money supply	денежная масса
pension fund	пенсионный фонд
primary market	первичный рынок (рынок сырьевых товаров)
principal	основная сумма, капитал
public spending	государственные расходы
repayment	платеж в погашение долга
secondary market	вторичный рынок
tax deductible	подлежащий налогообложению
tax shield	налоговая защита
Treasury Bill	1) англ. казначейский вексель 2) амер. налоговый сертификат
Treasury Bond	долгосрочная казначейская облигация
VAT or value-added	НДС, налог на добавленную стоимость