Dr Lokanandha Reddy Irala wwwiralaorg 2 Bonds Basics What is a bond How does it differ from Equity Do you like a bond or Equity ID: 612460
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Slide1
Bonds-Basics
Dr. Lokanandha Reddy Irala (www.irala.org)
2
Slide2
Bonds- Basics
What is a bond?
How does it differ from Equity
Do you like a bond or Equity?
How do you value a bond?What determines the value of a bond?How to measure returns from a bond?
Dr.
Irala
2
BondsSlide3
The basic features of a Bond
Face ValueIssue PriceInterest/Coupon rate
Life
of the
Bond/ Term To Maturity(TTM)Redemption Value(RV)Market PriceYield
Dr. Irala
3
DividendsSlide4
Lokanandha Reddy Irala
4
Two Main Forms of Capital
Equity
Debt
Two Main Forms of
InvestmentSlide5
Lokanandha Reddy Irala
5
Two Main Forms of Capital
Equity Capital
Issue through Equity shares
Ownership (Voting Rights)
Full control over the company
Returns in the form of Dividends & Capital appreciationSlide6
Lokanandha Reddy Irala
6
Two Main Forms of Capital
Equity Capital
Dividends are not fixed ..
High dividends possible
&
Low or no dividends can’t be ruled out
Dividends may not be regular
(Dividends are not periodic)Slide7
Lokanandha Reddy Irala
7
Two Main Forms of Capital
Equity Capital
Huge capital appreciation possible when firm does well …
Capital loss can’t be ruled out when going gets tough
Infinite life
( Equity shares not redeemed ... Buy back of equity possible though)Slide8
Lokanandha Reddy Irala
8
Two Main Forms of Capital
Equity Capital
Claim only on the residual assets, while liquidation Slide9
Lokanandha Reddy Irala
9
Two Main Forms of Capital
Equity Vs Debt
Equity
Issue through Equity shares
Ownership
(Voting Rights)
Full control over the company
Returns in the form of
Dividends & Capital appreciationDebt
Issue through Debentures / BondsNo Ownership (No Voting Rights)Low or No control over the companyReturns in the form of Interest & Capital appreciationSlide10
Lokanandha Reddy Irala
10
Two Main Forms of Capital
Equity Vs Debt
Equity
Dividends are not fixed .. High dividends possible & low or no dividends can’t be ruled out
Dividends may not be regular (not periodic)
Debt
Interest is contractually fixed
Interest payments are periodicSlide11
Lokanandha Reddy Irala
11
Two Main Forms of Capital
Equity Vs Debt
Equity
Huge capital appreciation possible when firm does well … Capital loss can’t be ruled out when going gets tough
Infinite life
Debt
Capital appreciation possible (
may not be huge though )
…
There will not be any Capital Loss even when going gets tough… until liquidationFinite lifeSlide12
Lokanandha Reddy Irala
12
Two Main Forms of Capital
Equity Vs Debt
Equity
Claim only on the residual assets, While liquidation
High risk
Debt
Claim on assets preceding many others, while liquidation
Relatively low risk Slide13
Lokanandha Reddy Irala
13
Two Main Forms of Capital
Equity Vs Debt : Firm Perspective
Equity
Dividends are paid after taxes
Dividends are appropriation of profits
Dividend is not contractually fixed
Debt
Interest is paid before taxes
Interest is an expense of the business
Interest is contractually fixed