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Match the responses on the right with the questions on the left
| 1. | So what exactly are bonds? | a. | Because of changes in interest rates. For example, no-one will pay the full price for a 6% bond if new bonds are paying 10%. |
| 2. | And how do they work? | b. | Exactly. And the opposite, a bond whose market value is higher than its face value, is above par. |
| 3. | So you have to keep them for a long time? | c. | I knew you'd finish by saying that! |
| 4. | Why should that happen? | d. | No, not at all. Bonds are very liquid. They can be sold on the secondary market until they mature. But of course, the price might have changed. |
| 5. | Oh, I see. Is that what they mean by below par? | e. | No, not unless it's a floating rate bond. The coupon, the amount of interest a bond pays, remains the same. But the yield will change. |
| 6. | But the bond's interest rate doesn't change? | f. | No, those are short-term (three-month) instruments which the government sells to and buys from the commercial banks, to regulate the money supply. |
| 7. | How's that? | g. | That's the name they use in Britain for long-term government bonds — gilts or gilt-edged securities. In the States they call them Treasury Bonds. |
| 8. | And people talk about AAA and AAB bonds, and things like that | h. | They're securities issued by companies, governments and financial institutions when they need to borrow money. |
| 9. | And what about gilts? | i. | Well, a bond's yield is its coupon payment expressed as a percentage of its price on the secondary market, so the yield changes if you buy or sell above or below par. |
| 10. | Not Treasury Bills? | j. | Well, they usually pay a fixed rate of interest and are repaid after a fixed period, known as their maturity, for example five, seven, or ten years. |
| 11. | And James Bond | k. | Yes. Bond-issuing companies are given an investment grade by private ratings companies such as Standard & Poors, according to their financial situation and performance. |
Work in pairs. Discuss advantages and disadvantages of different types of bonds. Make up your own dialogues using the following words and word combinations.
Repayment terms, to exempt from federal taxation, coupons, bearer, the bond indenture, unsecured bonds, speculative-grade bonds, corporate bonds, collateral, par value, market rate, the book entry method, mortgage bond, covenant, callable.
11. Complete the following.
1. Companies generally use investment banks to …..their bonds.
2. Thereafter, they can be traded on the... market.
3. The amount of interest a bond pays is often called its
4. The majority of bonds have a... rate of interest.
5. A bond's........... depends on the price it was bought at.
6. A bond priced at 104% is described as being
7. Bonds are repaid at 100% at.....
8. AAA is the highest..........
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