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Bonds-Basics Dr. Lokanandha Reddy Irala (www.irala.org) 1
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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 Bonds
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The basic features of a Bond Face Value Issue Price Interest/Coupon rate Life of the Bond/ Term To Maturity(TTM) Redemption Value(RV) Market Price Yield Dr. Irala 3 Dividends
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Lokanandha Reddy Irala 4 Two Main Forms of Capital Equity Debt Two Main Forms of Investment
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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 appreciation
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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)
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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)
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Lokanandha Reddy Irala 8 Two Main Forms of Capital Equity Capital Claim only on the residual assets, while liquidation
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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 appreciation Debt Issue through Debentures / Bonds No Ownership (No Voting Rights) Low or No control over the company Returns in the form of Interest & Capital appreciation
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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 periodic
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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 liquidation Finite life
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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
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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
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