Question

What are the two types of cash flows does an investor get when they invest in a bond?
Company issues $100,000,000 of bonds which are due January 1, 2025.  The advantage
to bondholders of Company setting up a sinking fund, is it reduces their risk of repayment.
What are two advantages to the company?
Briefly explain
Treasury bonds
Foreign bonds
Zero coupon bonds
Callable bonds
Corporate bonds
Municipal bonds Cash Flow properties of a bond What investor pay and when What does investor gets and when									What

Answer 1

Two Types of cashflows that an invetsor in bond will get are periodic cashflows through coupans and Capital gain or loss if the investor sells the bond before maturity or the principal payment if the invetsor invests till maturity of the bond. teh advantage of sinking fund provision to teh company are

• A sinking fund helps the company to pay its liability well in advance.
• A sinking fund also increases the goodwill of the company by paying the debt in time, and this will increase the faith of investors and attract more investment.

To the bondholder the advantage of the sinking fund is

• Bonds with a sinking fund provision have less credit risk because the periodic redemptions reduce the total amount of principal to be repaid at maturity

Treasury bonds are the bonds that are issued by the government. They helps in deriving the corporate bond curve or the yield curve. These bonds have maturity anout 10 years. These bonds include risk free rate, default risk premium, and inflation premium.

Foreign bonds- Bonds issued by a firm incorporated in a foreign country that trade on the national bond market of another country in that country’s currency are referred to as foreign bonds.

Zero coupan Bonds- These bonds do not pay coupans and only pay principal amount at maturity. They do not have Price risk and and reinvestmnet risk if bond is held till maturity

Callable bonds are the bonds that gives the issure of the bond the right to call back the bond when interest rate rises, hence the yield on these bonds are slightly higher than the putable bonds

Corporate Bonds are the bonds issued with various coupan structures such as fixed or floating coupan payment, can be callable or putable or conversion options.

Municipal Bonds- Default rate on these bonds are low and issued by local governmnet to raise the funds

Cash flow properties of bonds- A typical bond has a bullet structure. Periodic interest payments (coupon payments) are made over the life of the bond, and the principal value is paid with the final interest payment at maturity. The interest payments are referred to as the bond’s coupons. When the final payment includes a lump sum in addition to the final period’s interest, it is referred to as a balloon payment.A loan structure in which the periodic payments include both interest and some repayment of principal (the amount borrowed) is called an amortizing loan.A bond can also be structured to be partially amortizing so that there is a balloon payment at bond maturity, just as with a bullet structure

Investor pay the purchase price of the bonds initially and in return they get coupans and principal amount at maturity