Finance English practice: Unit 33 — Bonds

Biz English

Apr 18, 2016

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Complete the sentences below. Use the key words if necessary.
- Government and corporate bonds
  
  key words
  Bonds      ○      fixed interest payments      ○      principal      ○      maturity date      ○      government bonds      ○      gilt-edged stock      ○      Treasury notes      ○      Treasury bonds      ○      corporate bonds      ○      credit ratings      ○      default      ○      insolvent
  
  are loans to local and national government and to large companies. The holders of bonds generally receive , once or twice a year, and get their money — known as the — back on a given . This is the date when the loan ends.
  
  Governments issue bonds to raise money and they are considered to be a risk-free investment. In Britain are known as or just gilts. In the US they are called , which have a maturity of 2-10 years, and , which have a maturity of 10-30 years. (There are also short-term Treasury bills which have a different function: see Units 25 and 27).
  
  Companies issue bonds, called , because they can usually pay less interest to bondholders than they would have to pay if they raised the same money by a bank loan. These bonds are generally safer than shared, because if a company cannot repay its debts it can be declared bankrupt. If this happens, the creditors can force the company to stop doing business, and sell its assets to repay them. In this way, bondholders will probably get some of their money back.
  
  Borrowers — the companies issuing bonds — are given by credit agencies such as Standard & Poor’s and Moody’s. This means that they are graded, or rated, according to their ability to repay the loan to the bondholders. The highest grade (AAA or Aaa) means that there is almost no risk that the borrower will — fail to pay interest or to repay the principal. Lower grades (e.g. Baa, BBB, C, etc.) mean an increasing risk of the borrower becoming — unable to pay interest or repay the capital.
  
  Prices and yields
  
  key words
  inversely      ○      yield      ○      coupon      ○      floating-rate notes
  
  Bonds are traded by banks which act as market makers for their customers, quoting bid and offer prices with a very small spread or difference between them. The price of bonds varies with interest rates. This means that if interest rates rise, so that new borrowers have to pay a higher rate, existing bonds lose value. If interest rates fall, existing bonds paying a higher interest rate than the marker rate increase in value. Consequently the of a bond — how much income it gives — depends on its purchase price as well as its or interest rate. There are also — bonds whose interest rate varies with market interest rates.
  
  Other types of bonds
  
  key words
  convertible shares      ○      convertibles      ○      zero coupon bonds      ○      capital gain      ○      junk bonds      ○      fallen angels
  
  When interest rates are high, some companies issue or , which are bonds that the owner can later change into shares. Convertibles pay lower interest rates than ordinary bonds, because the buyer gets the chance of making a profit with the convertible option.
  
  There are also that pay no interest but are sold at a big discount on their par value, which is 100%, and repaid at 100% at maturity. Because they pay no interest, their owners don’t receive money every year (and so don’t have to decide how to reinvest it); instead they make a at maturity.
  
  Bonds with a low credit rating (and a high chance of default), but paying a high interest rate, are called . Some of these are known as — bonds of companies that were previously in a good financial situation, while others are issued to finance leveraged buyouts.
British English or American English?
- convertible share
  - American English
  - British English
- convertible bond
  - British English
  - American English
Match the definitions with the words below.
- 1. The amount of capital making up a loan — . . .
  principal
  .
  - main
  - interest
  - principal
- 2. An estimation of a borrower’s solvency or ability to pay debts — . . .
  credit rating
  .
  - credit history
  - Moody’s rating
  - credit rating
- 3. Bonds issued by the British government — . . .
  gilt-edged stock
  .
  - Treasury notes
  - gilt-edged stock
  - Treasury bonds
- 4. Non-payment of interest or a loan at the scheduled time — . . .
  default
  .
  - bankruptcy
  - default
  - risk
- 5. The day when a bond has to be repaid — . . .
  maturity date
  .
  - ransom date
  - closing time
  - maturity date
- 6. Long-term bonds issued by the American government — . . .
  Treasury bonds
  .
  - Treasury notes
  - gilts
  - Treasury bonds
- 7. The amount of interest that a bond pays — . . .
  coupon
  .
  - dividend
  - voucher
  - coupon
- 8. Medium-term (2-10 years) bonds issued by the American government — . . .
  Treasure notes
  .
  - gilts
  - Treasure bonds
  - Treasure notes
- 9. The rate of income an investor receives from a security — . . .
  yield
  .
  - profit
  - cash payment
  - yield
- 10. Unable to pay debts — . . .
  insolvent
  .
  - solvent
  - insolvent
  - ruined
Are the following statements true or false?
- 1. Bonds are repaid at 100% when they mature, unless the borrower is insolent. clue
  — The holders of bonds get their money back on a given maturity date.
  - true
  - false
- 2. Bondholders are guaranteed to get all their money back if a company goes bankrupt. clue
  — If a company declared bankrupt bondholders will probably get some of their money back.
  - false
  - true
- 3. AAA bonds are a very safe investment. clue
  — The highest grade AAA means that there is almost no risk that the borrower will default.
  - true
  - false
- 4. A bond paying 5% interest would gain in value if interest rates rose to 6%. clue
  — If interest rates rise, so that new borrowers have to pay a higher rate, existing bonds lose value.
  - true
  - false
- 5. The price of floating-rate notes doesn’t vary very much, because they always pay market interest rates. clue
  — Floating-rate notes whose interest rate varies with market interest rates.
  - true
  - false
- 6. The owners of convertibles have to change them into shares. clue
  — Convertibles are bonds that the owner can later change into shares; the buyer gets the chance of making a profit with the convertible option.
  - true
  - false
- 7. Some bonds do not pay interest, but are repaid at above their selling price. clue
  — Zero coupon bonds pay no interest but are sold at a big discount on their par value.
  - true
  - false
- 8. Junk bonds have a high credit rating, and a relatively low chance of default. clue
  — Bonds with a low credit rating (and a high chance of default) are called junk bonds.
  - false
  - true
Answer the questions
- Which is the safest for an investor? — . . .
  a government bond
  - a corporate bond
  - a junk bond
  - a government bond
- Which is the cheapest way for a company to raise money? — . . .
  a convertible
  - an ordinary bond
  - a convertible
  - a bank loan
- Which gives the highest potential return to an investor? — . . .
  a junk bond
  - a junk bond
  - a government bond
  - a corporate bond
- Which is the most profitable for an investor if interest rates rise? — . . .
  a floating-rate note
  - a floating-rate note
  - a Treasury bond
  - a Treasury note

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