【正文】 Money and Capital Markets 21 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose McGraw Hill / Irwin Slides by YeeTien (Ted) Fu Business Borrowing ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 2 ? Learning Objectives ? ? To look at how business firms issue debt securities and negotiate loans in order to raise funds in the money and capital markets. ? To learn about the key factors affecting the volume of funds that businesses seek to raise in the financial system. ? To see the often powerful impact that business borrowing has upon market interest rates and credit conditions. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 3 Introduction ? Business firms draw on a wide variety of fund sources to finance their daily operations and to carry out longterm investment. ? In 2020, nonfinancial business firms in the . raised about $1,250 billion, of which approximately $860 billion was supplied from the financial markets through issues of bonds, stocks, notes, and other financial instruments. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 4 Factors Affecting Business Activity in the Money and Capital Markets ? Many factors affect the extent to which business firms draw on the money and capital markets for external funds: ? Total funding demands of business firms ? Level and expected growth of internally generated funds ? Condition of the economy ? Credit availability and interest rates ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 5 Characteristics of Corporate Notes and Bonds ? A note has an original maturity of five years or less, while a bond carries an original maturity of more than five years. ? Both securities promise the investor an amount equal to the security’s par value at maturity plus interest payments at specified intervals. ? They are generally issued in units of $1,000, and acpanied by indentures. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 6 Characteristics of Corporate Notes and Bonds ? Corporate bonds tend to be issued with longer maturities when both interest rates and inflation are low. ? Some corporate bonds are backed by sinking funds. ? A considerable proportion of corporate bonds that are outstanding today carry call privileges. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 7 Characteristics of Corporate Notes and Bonds ? During periods of rapid economic expansion, when the supply of credit is relatively scarce, the cost of borrowing rises. ? Yields on the highestgrade bonds tend to move closely with government bond yields. ? Yields carried by lowergrade corporate bonds are more closely tied to conditions in the economy and to factors specifically affecting the risk position of each borrowing firm. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 8 Characteristics of Corporate Notes and Bonds The Signals that Corporate Bond Issues Send ? A bond issue that appears to be driven by an unanticipated cashflow shortage tends to lower the bond and equity prices of the issuer. ? On the other hand, a new bond sold to expand the firm’s capitalization tends to send a positive signal to the market. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 9 Characteristics of Corporate Notes and Bonds ? Common types of corporate bonds include: ? Debentures – bonds that are not secured by any specific asset ? Subordinated debentures – junior securities ? Mortgage bonds – may be closed end or open end ? Ine bonds – interest is paid only when ine is actually earned ? Equipment trust certificates – resemble leases ? Industrial development bonds (IDBs) – issued by a local government borrowing authority ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 21 10 Characteristics of Corporate Notes and Bonds ? New types of corporate notes and bonds include: ? Discount bonds – include zero coupon bonds ? Floatingrate bonds ? Commoditybacked bonds – the face value is tied to the market price of an internationally trade