Curso de Inglés Comercial y de Negocios

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Governments and companies often need to borrow more money than a single . So they depend, instead, on credit markets. Sales of bonds or similar securities help finance governments and businesses, while investors earn .

Bonds are loans. They must be repaid at the end of an established period, when the bond reaches maturity. During that period, the , called the issuer, must make interest payments to the .

The is called the yield. A one thousand dollar bond with a yield of five percent would pay interest of fifty dollars per .

Some bonds are considered free of for investors. United States Treasury bonds, for example, are supported by "the full faith and " of the government.

But, in credit markets, how does an investor know if a company can pay its debts? Credit rating agencies help. These companies investors how they are to receive the principal with interest. The principal is the amount of the bond at .

Such advice helps markets to the of credit. We talked last week about credit rating agencies. The two biggest in America are Standard and Poor’s and Moody’s Investors Service. We described how they recently the credit rating of General Motors and Ford Motor Company.

A change in the credit rating of a can affect the price of its bonds. Standard and Poor’s gave G.M. a rating of double-B and Ford a rating of double-B-plus. Those ratings are known as junk status, or below investment grade. The lower the rating for a company, the its debt is considered for investors.

Credit markets reacted; the price of G.M. and Ford bonds . This week, the price for a G.M. bond maturing in two thousand was a little over seven hundred ten dollars. Bonds are usually sold in the of one thousand dollars. So buyers who paid full price would get back only about three-fourths of the if they sold that bond now.

But, as bond prices fall, the yield increases. This is because the interest stays the same, so long as the bond issuer continues to . Risky bonds appeal to some investors because of the lower cost and higher yield. The risk, however, is that the investors their money

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The term duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.

For each of the two basic types of bonds the duration is the following:

1. Zero-Coupon Bond – Duration is equal to its time to maturity.

2. Vanilla Bond - Duration will always be less than its time to maturity

Bearer Bonds: Bond certificates which can be held anonymously and used almost as freely as cash.
Capital Bonds (National Savings): National Savings product designed for lump sum investments. Return is maximised if held for five years and is liable to income tax.
Capped Bonds: The floating interest rate charged cannot rise above a specific level.
Conventional Stocks and Bonds: Bonds with fixed interest rates and repayment dates.
Convertible Bonds: Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future into ordinary shares according to a prearranged formula.
External Bonds: Bonds issued in the market of one country which are denominated in the currency of another.
Foreign Bonds: Issues of loan stock on the domestic market by non-resident firms or organisations. In London, they are called bulldogs, in New York Yankees.
Government Bonds: Bonds issued by a government to finance fiscal borrowing requirements.
Guaranteed Equity Bonds: Investment products which promise a stock market linked return if the market rises, and the return of the original capital if the stock market falls.
International Bonds: Securities issued by borrowers in a market outside that of their domestic currency.