Business Finance Test #2 (Chapter 7-???)

The value of a floating-rate bond depends on exactly how the

coupon payment adjustments are defined.

A financial market is transparent if it is

possible to easily observe its prices and trading volume.

Because the bond sells for more than face value, it is said to be a

premium bond.

A positive covenant is a

"thou shalt" type of covenant. It specifies an action the company agrees to take or a condition the company must abide by. Here are some examples: The company must maintain its working capital at or above some specified minimum level. The company must periodically furnish audited financial statements to the lender. The firm must maintain any collateral or security in good condition.

1+R =

(1 + r) x (1 + h)

The three cases we consider are the following:

(1) The dividend has a zero growth rate, (2) the dividend grows at a constant rate, and (3) the dividend grows at a constant rate after some length of time.

The trust company must

(1) make sure the terms of the indenture are obeyed, (2) manage the sinking fund (described in the following pages), and (3) represent the bondholders in default—that is, if the company defaults on its payments to them.

Present Value of a Stock =

(D1 + P1)/(1 + R)

P2 =

(D3 +P3)/(1 + R)

Corporate bonds usually have a face value (that is, a denomination) of

1000 but not always.

Section 7.5

Bond Markets

Higher Yield Bonds are just a fancy name for

JUNK BONDS

Bid

The price a dealer is willing to pay for a security.

The person or firm making the loan is called the

creditor or lender.

A bond's yield to maturity is not that same as its

current yield.

The corporation borrowing the money is called the

debtor or borrower.

Indenture is sometimes referred to as the

deed of trust.

The main difference between public-issue and privately placed debt is that the latter is

directly placed with a lender and not offered to the public.

This steepness tells us that a relatively small change in interest rates will lead to a substantial change in the bond's value. In comparison, the one-year bond's price is relatively

insensitive to interest rate changes.

The risk that arises for bond owners from fluctuating interest rates is called

interest rate risk.

In general, if there are N directors up for election, then 1/(N + 1) percent of the stock plus one share will guarantee you a seat. In our current example, this is 1/(4 + 1) = 20%. So the

more seats that are up for election at one time, the easier (and cheaper) it is to win one.

If you buy a bond between coupon payment dates, the price you pay is usually

more than the price you are quoted.

When interest rates fall, the bond is worth

more.

Debt securities are typically called

notes, debentures, or bonds

The dividends currently being paid are one of the

primary factors we look at when attempting to value common stocks. However, it is obvious from looking at Kate Spade that current dividends are not the end of the story. This chapter explores dividends, stock values, and the connection between the two.

R is approximately

r + h

How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes. This sensitivity directly depends on two things:

the time to maturity and the coupon rate.

trading volume in bonds on a typical day is many, many times larger than

the trading volume in stocks

As long as the growth rate, g, is less than the discount rate, r, the present value of this series of cash flows can be written simply as:

P0 = D1/(R - g)

Face Value is also called

Par Value

Coupon Rate

The annual coupon divided by the face value of a bond.

Deferred Call Provision

A call provision prohibiting the company from redeeming a bond prior to a certain date.

A corporate bond will frequently have a maturity of

30 years.

Zero Coupon Bonds (Zeroes)

A bond that pays no coupons at all must be offered at a price that is much lower than its stated value.

Call Protected Bond

A bond that, during a certain period, cannot be redeemed by the issuer.

Current Yield

A bond's annual coupon divided by its price.

Treasury Yield Curve

A plot of the yields on Treasury notes and bonds relative to maturity

Straight Voting

A procedure in which a shareholder may cast all votes for each member of the board of directors. The directors are elected one at a time. Each time, Smith can cast 20 votes and Jones can cast 80. As a consequence, Jones will elect all of the candidates. The only way to guarantee a seat is to own 50 percent plus one share. This also guarantees that you will win every seat, so it's really all or nothing.

Cumulative Voting

A procedure in which a shareholder may cast all votes for one member of the board of directors.

Reverse Convertible

A relatively new type of structured note. One type generally offers a high coupon rate, but the redemption at maturity can be paid in cash at par value or paid in shares of stock.

Dividend

A stock's expected cash dividend divided by its current price. D1/P0

Warrant

A warrant gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.

put bond

Allows the holder to force the issuer to buy back the bond at a stated price.

Present value of a constant growth rate of any perpetuity

C1/(R - g) or C0 x (1 + g)/(R - g)

Convertible Bond

Can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option. Convertibles are relatively common, but the number has been decreasing in recent years.

Section 8.1

Common Stock Valuation

Dt =

D0 x (1 +g) raised to the power of t

Two Unique things about U.S. Treasury issues:

First, U.S. Treasury issues, unlike essentially all other bonds, have no default risk because (we hope) the Treasury can always come up with the money to make the payments. Second, Treasury issues are exempt from state income taxes (though not federal income taxes). In other words, the coupons you receive on a Treasury note or bond are taxed only at the federal level.

There are two drawbacks to bearer bonds.

First, they are difficult to recover if they are lost or stolen. Second, because the company does not know who owns its bonds, it cannot notify bondholders of important events.

Seniority

Indicates preference in position over other lenders, and debts are sometimes labeled as senior or junior to indicate seniority

Preference

Means only that the holders of the preferred shares must receive a dividend (in the case of an ongoing firm) before holders of common shares are entitled to anything

The two leading bond-rating firms are

Moody's and Standard & Poor's (S&P) The debt ratings are an assessment of the creditworthiness of the corporate issuer. The definitions of creditworthiness used by Moody's and S&P are based on how likely the firm is to default and the protection creditors have in the event of a default.

Section 7.4

Some Different Types of Bonds

The bond indenture is a legal document that usually includes the following provisions:

The basic terms of the bonds. The total amount of bonds issued. A description of property used as security. The repayment arrangements. The call provisions. Details of the protective covenants.

Interest Rate Risk Premium

The compensation investors demand for bearing interest rate risk.

floating-rate bonds (floaters)

The coupon payments are adjustable. The adjustments are tied to an interest rate index such as the Treasury bill interest rate or the 30-year Treasury bond rate.

Bid-ask Spread

The difference between the bid price and the asked price.

The majority of floaters have the following features:

The holder has the right to redeem the note at par on the coupon payment date after some specified amount of time. This is called a put provision, and it is discussed in the following section. The coupon rate has a floor and a ceiling, meaning that the coupon is subject to a minimum and a maximum. In this case, the coupon rate is said to be "capped," and the upper and lower rates are sometimes called the collar.

Two-Stage Growth

The idea is that the dividend will grow at a rate of g1 for t years and then grow at a rate of g2 thereafter forever. In this case, the value of the stock can be written as: P0 = D1/(R - g1) x (1 - ((1 + g1)/(1 + R)) to power t) + Pt/(1 + R) to power t Pt = Dt+1/R-g2) = D0 x (1 + g1) to t x (1 +g2) / (R - g2)

However, the exact mechanism for electing directors differs across companies.

The most important difference is whether shares must be voted cumulatively or voted straight.

Liquidity Premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.

Default Risk Premium

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

For a simple example of nonconstant growth, consider the case of a company that is currently not paying dividends. You predict that, in five years, the company will pay a dividend for the first time. The dividend will be $.50 per share. You expect that this dividend will then grow at a rate of 10 percent per year indefinitely. The required return on companies such as this one is 20 percent. What is the price of the stock today?

To see what the stock is worth today, we first find out what it will be worth once dividends are paid. We can then calculate the present value of that future price to get today's price. The first dividend will be paid in five years, and the dividend will grow steadily from then on. Using the dividend growth model, we can say that the price in four years will be: P4 = D4 x (1 + g)/(R - g) = D5/(R - g) = 0.50/(0.20 - .10) = 5 P0 = 5/1.20 to the 4th = 2.41

YTM stands for

Yield to Maturity

Unlike Treasury issues, munis have varying degrees of default risk, and, in fact, they are rated much like corporate issues. Also, they are almost always callable. The most intriguing thing about munis is that their coupons are exempt from

federal income taxes (though not necessarily state income taxes), which makes them very attractive to high-income, high-tax bracket investors.

A bond that sells for its par value is called a

par value bond.

Chapter 8

Stock Valuation

Collateral

A general term that frequently means securities (for example, bonds and stocks) that are pledged as security for payment of debt.

Proxy Voting

A grant of authority by a shareholder allowing another individual to vote his or her shares. For convenience, much of the voting in large public corporations is actually done by proxy.

Protective Covenants

A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lenders interest.

The highest rating a firm's debt can have is

AAA or Aaa, and such debt is judged to be the best quality and to have the lowest degree of risk.

We have illustrated here that the price of the stock today is equal to the present value of

All of the future dividends.

You should keep the following in mind when looking at a bond:

All other things being equal, the longer the time to maturity, the greater the interest rate risk. All other things being equal, the lower the coupon rate, the greater the interest rate risk.

Sinking Fund

An account managed by the bond trustee for early bond redemption. The company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt. The trustee does this by either buying up some of the bonds in the market or calling in a fraction of the outstanding bonds.

Call Provision

An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity. Corporate bonds are usually callable.

Growing Perpetuity

An asset with cash flows that grow at a constant rate forever.

Debenture

An unsecured debt, usually with a maturity of 10 years or more.

Nonconstant Growth

As we discussed earlier, the growth rate cannot exceed the required return indefinitely, but it certainly could do so for some number of years. To avoid the problem of having to forecast and discount an infinite number of dividends, we will require that the dividends start growing at a constant rate sometime in the future.

Section 7.1

Bonds and Bonds Valuation

Structured notes

Bonds that are based on stocks, bonds, commodities, or currencies. One particular type of structured note has a return based on a stock market index.

R =

D1/P0 / g

The main differences between debt and equity are the following:

Debt is not an ownership interest in the firm. Creditors generally do not have voting power. The corporation's payment of interest on debt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible. Unpaid debt is a liability of the firm. If it is not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.

Section 7.7

Determinants of Bond Yields

Return =

Dividend Yield + Capital Gains Yield

Common Stock

Equity without priority for dividends or in bankruptcy.

A share of common stock is more difficult to value in practice than a bond for at least three reasons.

First, with common stock, not even the promised cash flows are known in advance. Second, the life of the investment is essentially forever because common stock has no maturity. Third, there is no way to easily observe the rate of return that the market requires.

Other Rights

In addition to the right to vote for directors, shareholders usually have the following rights: The right to share proportionally in dividends paid. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation. The right to vote on stockholder matters of great importance, such as a merger. Voting is usually done at the annual meeting or a special meeting. In addition, stockholders sometimes have the right to share proportionally in any new stock sold. This is called the preemptive right. Essentially, a preemptive right means that a company that wishes to sell stock must first offer it to the existing stockholders before offering it to the general public. The purpose is to give stockholders the opportunity to protect their proportionate ownership in the corporation.

The real rate doesn't really determine the shape of the term structure; instead, it mostly influences the overall level of interest rates.

In contrast, the prospect of future inflation strongly influences the shape of the term structure.

Section 7.6

Inflation and Interest Rates

Chapter 7

Interest Rates and Bond Valuation

Section 7.3

Interest Rates and Bond Valuations

Real Rates

Interest rates or rates of return that have been adjusted for inflation.

Nominal Rates

Interest rates or rates of return that have not been adjusted for inflation.

You might wonder what would happen with the dividend growth model if the growth rate, g, were greater than the discount rate, R.

It looks like we would get a negative stock price because R − g would be less than zero. This is not what would happen. Instead, if the constant growth rate exceeds the discount rate, then the stock price is infinitely large. Why? If the growth rate is bigger than the discount rate, the present value of the dividends keeps getting bigger. Essentially the same is true if the growth rate and the discount rate are equal. In both cases, the simplification that allows us to replace the infinite stream of dividends with the dividend growth model is "illegal," so the answers we get from the dividend growth model are nonsense unless the growth rate is less than the discount rate.

Section 7.2

More about Bond Features

What is the largest securities market in the world?

Most people would guess the New York Stock Exchange. In fact, the largest securities market in the world in terms of trading volume is the U.S. Treasury market

Issues with an original maturity of 10 years or less are often called

Notes

Zero Growth of dividend in a constant payment common stock much like a preferred stock.

P0 = D/R

Dividends

Payments by a corporation to shareholders, made in either cash or stock.

Blanket Mortgage

Pledges all the real property owned by the company.

Bond Value =

Present Value of the coupons + Present value of the face amount

Stock Valuations Using Multiples

Price at time t = Pt = Benchmark PE ratio x EPSt

Mortgage Securities

Secured by a mortgage on the real property of the borrower. The property involved is usually real estate—for example, land or buildings. The legal document that describes the mortgage is called a mortgage trust indenture or trust deed.

Income bonds

Similar to conventional bonds, except that coupon payments depend on company income. Specifically, coupons are paid to bondholders only if the firm's income is sufficient. This would appear to be an attractive feature, but income bonds are not very common.

Section 8.2

Some Features of Common and Preferred Stocks

Overall, staggering has two basic effects:

Staggering makes it more difficult for a minority to elect a director because there are fewer directors to be elected at one time. Staggering makes takeover attempts less likely to be successful because it makes it more difficult to vote in a majority of new directors.

Preferred Stock

Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.

Inflation-linked bond

Such bonds have coupons that are adjusted according to the rate of inflation (the principal amount may be adjusted as well). The U.S. Treasury began issuing such bonds in January of 1997. The issues are sometimes called "TIPS," or Treasury Inflation-Protected Securities.

Constant Growth

Suppose we know that the dividend for some company always grows at a steady rate. Call this growth rate g. If we let D0 be the dividend just paid, then the next dividend, D1, is: D1 = D0 x (1 + g)

Call Premium

The amount by which the call price exceeds the par value of a bond.

Shareholder Rights

The conceptual structure of the corporation assumes that shareholders elect directors who, in turn, hire managers to carry out their directives. Shareholders, therefore, control the corporation through the right to elect the directors. Generally, only shareholders have this right. Directors are elected each year at an annual meeting. Although there are exceptions (discussed next), the general idea is "one share, one vote" (not one shareholder, one vote). Corporate democracy is thus very different from our political democracy. With corporate democracy, the "golden rule" prevails absolutely.

Dividend Growth Model

The dividend growth rate, or the rate at which the value of an investment grows.

Capital Gains Yield

The dividend growth rate, or the rate at which the value of an investment grows. Also known as the growth rate.

If we combine all of the things we have discussed regarding bond yields, we find that bond yields represent the combined effect of no fewer than six things:

The first is the real rate of interest. On top of the real rate are five premiums representing compensation for (1) expected future inflation, (2) interest rate risk, (3) default risk, (4) taxability, and (5) lack of liquidity. As a result, determining the appropriate yield on a bond requires careful analysis of each of these effects.

Bearer Form

The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond.

Registered Form

The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record.

Taxability Premium

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.

Inflation Premium

The portion of a nominal interest rate that represents compensation for expected future inflation.

Asked Price

The price a dealer is willing to take for a security.

Dirty Price

The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.

Clean Price

The price of a bond net of accrued interest; this is the price that is typically quoted.

Face Value

The principal amount of a bond that is repaid at the end of the term. Also called par value.

Yield to Maturity

The rate required in the market on a bond.

Term Structure of Interest Rates

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money The term structure of interest rates tells us what nominal interest rates are on default-free, pure discount bonds of all maturities.

Fisher Effect

The relationship between nominal returns, real returns, and inflation.

Maturity

The specified date on which the principal amount of a bond is paid.

Coupon

The stated interest payment made on a bond.

Growth Stocks

The stock is worth absolutely nothing. Such a company is a financial "black hole." Money goes in, but nothing valuable ever comes out. Because nobody would ever get any return on this investment, the investment has no value. This example is a little absurd, but it illustrates that when we speak of companies that don't pay dividends, what we really mean is that they are not currently paying dividends.

Indenture

The written agreement between the corporation and the lender detailing the terms of the debt issue.

Classes of Stock

There are many other cases of corporations with different classes of stock. For example, at one time, General Motors had its "GM Classic" shares (the original) and two additional classes, Class E ("GME") and Class H ("GMH"). These classes were created to help pay for two large acquisitions, Electronic Data Systems and Hughes Aircraft. Another good example is Google, the Web search company, which only recently became publicly owned. Google has two classes of common stock, A and B. The Class A shares are held by the public, and each share has one vote. The Class B shares are held by company insiders, and each Class B share has 10 votes. Then, in 2014, the company had a stock split of its Class B shares, creating Class C shares, which have no vote at all. As a result, Google's founders and managers control the company. Historically, the New York Stock Exchange did not allow companies to create classes of publicly traded common stock with unequal voting rights. Exceptions (like Ford) appear to have been made. In addition, many non-NYSE companies have dual classes of common stock. A primary reason for creating dual or multiple classes of stock has to do with control of the firm. If such stock exists, management of a firm can raise equity capital by issuing nonvoting or limited-voting stock while maintaining control. The subject of unequal voting rights is controversial in the United States, and the idea of one share, one vote has a strong following and a long history. Interestingly, however, shares with unequal voting rights are quite common in the United Kingdom and elsewhere around the world.

Treasury notes and bonds have three important features that we need to remind you of:

They are default-free, they are taxable, and they are highly liquid. This is not true of bonds in general, so we need to examine what additional factors come into play when we look at bonds issued by corporations or municipalities.

Under new regulations, corporate bond dealers are now required to report trade information through what is known as the

Trade Reporting and Compliance Engine (TRACE).

The biggest borrower in the world—by a wide margin—is everybody's favorite family member,

Uncle Sam (USA).

Some important characteristics of dividends include the following:

Unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation. A corporation cannot default on an undeclared dividend. As a consequence, corporations cannot become bankrupt because of nonpayment of dividends. The amount of the dividend and even whether it is paid are decisions based on the business judgment of the board of directors. Page 254 The payment of dividends by the corporation is not a business expense. Dividends are not deductible for corporate tax purposes. In short, dividends are paid out of the corporation's aftertax profits. Dividends received by individual shareholders are taxable. In 2014, the tax rate was 15 to 20 percent, but this favorable rate may change. However, corporations that own stock in other corporations are permitted to exclude 70 percent of the dividend amounts they receive and are taxed on only the remaining 30 percent

"make-whole" call

With such a feature, bondholders receive approximately what the bonds are worth if they are called. Because bondholders don't suffer a loss in the event of a call, they are "made whole."

A negative covenant is

a "thou shalt not" type of covenant. It limits or prohibits actions the company might take. Here are some typical examples: The firm must limit the amount of dividends it pays according to some formula. The firm cannot pledge any assets to other lenders. The firm cannot merge with another firm. The firm cannot sell or lease any major assets without approval by the lender. The firm cannot issue additional long-term debt. Want detailed information about the amount and terms of the debt issued by a particular firm? Check out its latest financial statements by searching SEC filings at www.sec.gov.

Generally, the call price is

above the bond's stated value (that is, the par value).

With cumulative voting, the directors are elected

all at once.

We've seen that the price of a bond can be written as the sum of its

annuity and lump sum components.

Collateral is commonly used to refer to

any asset pledged on a debt.

A bond could also be in

bearer form.

Issues with an original maturity of MORE than 10 years are called

bonds.

When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called

bonds.

A bond's credit rating can

change as the issuer's financial strength improves or deteriorates.

Because the bond sells for less than face value, it is said to be a

discount bond.

Securities issued by corporations may be classified roughly as

equity securities or debt securities.

Bonds that drop into junk territory like this are called

fallen angels

Some bonds are zero coupon bonds

for only part of their lives.

Many companies have staggered elections for directors. With staggered elections, only a

fraction of the directorships (often one-third) are up for election at a particular time. Thus if only two directors are up for election at any one time, it will take 1/(2 + 1) = 33.33% of the stock plus one share to guarantee a seat. Staggered boards are often called classified boards because directors are placed into different classes with terms that expire at different times. In recent years, corporations have come under pressure to declassify their boards, meaning that all directors would stand for election every year, and many have done so.

If we compared a 10-year bond to a 1-year bond, we would see that the 10-year bond has much

greater interest rate risk.

g stands for the

growth rate.

If investors believe the rate of inflation will be higher in the future, then long-term nominal interest rates will tend to be

higher than short-term rates.

The real rate on an investment is the percentage change in

how much you can buy with your dollars—in other words, the percentage change in your buying power.

One important thing we learn is that bond values depend, in large part, on

interest rates.

When interest rates rise, the present value of the bond's remaining cash flows declines, and the bond

is worth less.

Maturity of a long-term debt instrument is the

length of time the debt remains outstanding with some unpaid balance.

the bond with the higher coupon has a larger cash flow early in its life, so its value is

less sensitive to changes in the discount rate.

Because the coupon is constant and paid every year, the type of bond we are describing is sometimes called a

level coupon bond.

If cumulative voting is permitted, the total number of votes that each shareholder may cast is determined first. This is usually calculated as the number of shares (owned or controlled)

multiplied by the number of directors to be elected.

State and local governments also borrow money by selling notes and bonds. Such issues are called

municipal notes or bonds.

Protective covenants can be classified into two types:

negative covenants and positive (or affirmative) covenants.

Preferred stock is a form of equity from a legal and tax standpoint. It is important to note, however, that holders of preferred stock sometimes have

no voting privileges.

A bond is normally an interest-only loan, meaning that the borrower will pay the interest every period, but

none of the principal will be repaid until the end of the loan.

One reason the bond markets are so big is that the

number of bond issues far exceeds the number of stock issues. There are two reasons for this. First, a corporation would typically have only one common stock issue outstanding (there are exceptions to this that we discuss in our next chapter). However, a single large corporation could easily have a dozen or more note and bond issues outstanding. Beyond this, federal, state, and local borrowing is simply enormous.

The nominal rate on an investment is the percentage change in the

number of dollars you have.

Bond yields are quoted like APRs; the quoted rate is equal to the actual rate per period multiplied by

number of periods.

One reason that corporations try to create a debt security that is really equity is to

obtain the tax benefits of debt and the bankruptcy benefits of equity.

It is important to recognize that bond ratings are concerned

only with the possibility of default.

As a general rule, equity represents an

ownership interest, and it is a residual claim. This means that equity holders are paid after debt holders.

If two bonds with different coupon rates have the same maturity, then the value of the one with the lower coupon is

proportionately more dependent on the face amount to be received at maturity.

Obviously, management always tries to get as many proxies as possible transferred to it. However, if shareholders are not satisfied with management, an "outside" group of shareholders can try to obtain votes via proxy. They can vote by proxy in an attempt to replace management by electing enough directors. The resulting battle is called a

proxy fight.

We see that the term structure reflects the combined effect of the

real rate of interest, the inflation premium, and the interest rate risk premium.

Corporate bonds are usually in

registered form.

Debenture holders have a claim only on property not otherwise pledged—in other words, the property that

remains after mortgages and collateral trusts are taken into account.

R is the

required rate of return for investors on the market.

Strictly speaking, a bond is a

secured debt.

Debt securities can be

short-term (with maturities of one year or less) or long-term (with maturities of more than one year).

The cash flow of the bonds can be treated as a(n) (blank) and the principle can be treated as (blank).

simple interest

When long-term rates are higher than short-term rates, we say that the

term structure is upward sloping. When short-term rates are higher, we say it is downward sloping.

To determine the value of a bond at a particular point in time, we need to know

the number of periods remaining until maturity, the face value, the coupon, and the market interest rate for bonds with similar features.

Bonds issued in the United States usually make coupon payments

twice a year.

Short-term debt is sometimes referred to as

unfunded debt.

As time passes, interest rates change in the marketplace. The cash flows from a bond, however, stay the same. As a result, the

value of the bond will fluctuate.

To give just one example, note that the maximum reward for owning a debt security is ultimately fixed by the amount of the loan,

whereas there is no upper limit to the potential reward from owning an equity interest.

Two of the most recent exotic bonds are CoCo bonds, which have a coupon payment, and NoNo bonds,

which are zero coupon bonds. CoCo and NoNo bonds are contingent convertible, putable, callable, subordinated bonds.

YTM is often referred to as the

yield.

Note that no matter what the stock price is, the present value is essentially

zero if we push the sale of the stock far enough away.