Bonds & Stocks
Bonds are loans, or IOUs, that represent debt that the government or corporation must repay to an investor.
The bond holder has NO OWNERSHIP of the company.
- If a corporation issues and then sells a bond,
- it is a liability or an asset for the corporation? Liability!
- it is a liability or an asset for the buyer? Asset!
- If that corporation issues a 10K loan with a 10 yr term and a 5% interest
- What is the nominal interest rate at the time of issue? 5%
- If the Nominal interest rate falls 3%, what happens to the value of the bond? Increase
- If the Nominal interest rate rises 8%, what happens to the value of the bond? Increase
Stockowners can earn a profit in two ways:
1. Dividends, which are portions of a corporations profits, are paid out to stockholders.
The higher the corporate profit, the higher the dividend.
2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it.
A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.
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