Unit 7 The Stock Exchange, Bonds

As we have seen, another way of earning money on the stock exchange is by making loans to companies or to the government in the form of fixed-interest securities - bonds. A bond is an instrument in which the issuer (debtor/borrower) promises to repay to the lender (investor) the amount borrowed plus interest over some specified period if time. Logically enough, holders of bonds are paid a fixed rate of interest, and such securities can be bought and sold like shares.

By far the largest issues of bonds are central governments. When revenues fall short of expenditures they go into debt and borrow short and long-term funds by issuing bonds.

In Britain, government bonds are known as gilt-edged securities (gilts) because they are very safe form of investment. Gilts are loans made to the government in order to finance its spending, and are repaid at a fixed future date (at maturity). The interest received on gilts is known as a coupon. Gilts fall into three categories depending on the date of maturity: shorts – they should be redeemed in 7 years or less; mediums – gilts to be redeemed in a period of 7 to 15 years and longs – they should be redeemed more than 15 years from the date of issue.

There are some types of gilts. Index-linked gilts – the coupon and the amount at which the gilts are redeemed is linked to inflation. Floating rate gilts – the coupon paid on these gilts varies depending on market conditions. Convertible gilts – when they reach maturity, the holder can decide whether he wants to have gilts redeemed or exchange them for new ones.

Bonds issued by British companies are called debentures. Unlike shareholders, debenture holders are not members of a company. They don’t share the members’ risks; they receive a regular income from their investment and take precedence of the shareholders if the company is liquidated – that means, debenture holders are paid before shareholders. This makes debentures a relatively safe form of investment.

Most debentures are secured, registered and redeemable. If a company cannot repay the loans or pay the interest, the holders of secured debentures are automatically entitled to payment from the company’s assets. The holders of registered debentures can transfer them only in accordance with certain terms and conditions. Redeemable debentures are repaid on a fixed date or within a certain period of time.

Words and expressions

fixed-interest securities- ценные бумаги с фиксированной доходностью

by far- в значительной степени

revenues fall short of expenditures - доходы меньше расходов

go into debt- осуществлять заимствования

maturity(n) - срок выплаты (погашения);

amount payable at maturity- сумма, выплачиваемая при наступлении срока

coupon(n) - купон - номинальный процентный доход по облигации

coupon rate- доходность облигаций с фиксированной процентной ставкой

shorts(n) - краткосрочные ценные бумаги

mediums(n) - среднесрочные ценные бумаги

longs(n) - долгосрочные ценные бумаги

redeem(v) - выплачивать долг, выкупать

e.g. How much will it cost to redeem my watch from pawn? - Сколько будет стоить выкупить мои часы из залога? syn: buy back

index-linked gilts - ценные бумаги, учитывающие уровень инфляции

floating rate gilts - ценные бумаги с плавающим курсом

convertible gilts- конвертируемые ценные бумаги

debenture (n) - облигация акционерного общества, компании

precedence(n) - первенство, превосходство

to take precedence of smth., smb.-превосходить что-либо, кого-либо

secured debenture- обеспеченное долговое обязательство

registered debenture- именное долговое обязательство

redeemable debenture- долговое обязательство, погашаемое в определенный срок

entitle(v) - давать право

to entitle smb. to smth.- давать право кому-либо на что-либо

transfer(v) - осуществлять перевод прав (на другое лицо)

Exercises

1. Answer the questions.

1) What is another way of earning money on the stock exchange?

2) What is a bond?

3) Can bonds be bought and sold like shares?

4) In what case do governments go into debt by issuing bonds?

5) What are gilts?

6) What is a coupon?

7) What categories do gilts fall into?

8) What are the periods of maturity of shorts, mediums and longs?

9) What are the types of government gilts?

10) Why are they called like that?

11) What are debentures?

12) What is the difference between debentures and shares?

13) What makes debentures a safe form of investment?

14) What types of debentures do you know?

2. Translate into English.

1) Какова стоимость этих облигаций?

2) Мои облигации не будут погашены еще в течение шести лет.

3) Обеспеченные долговые обязательства – довольно безопасная форма инвестирования.

4) Эта компания обещает выплатить стоимость облигаций через пятнадцать лет и ежегодно выплачивать фиксированный процент.

5) Как владелец облигаций может зарабатывать деньги?

6) Вы можете продать свои облигации на фондовой бирже раньше срока погашения.

7) Покупая ценные бумаги, учитывающие уровень инфляции, вы сокращаете риск.

8) Существует много типов гарантированных ценных бумаг и облигаций компаний.

3. Complete the text using the words:

bonds, fixed interest rate, investing, value, maturity, organization, redeem, long-term, fluctuation

Bonds

One way of 1) … your money is to buy 2) … . This means that you lend your money to an 3) … for a fixed period of time at a 4) … . The organization promises to 5) … you in the agreed term, and meanwhile, you get a yearly interest.

Bonds are normally issued for periods of 15 years or more, so they are 6) … investments and pay more than short-term.

If you need your money before your bonds come to 7) …, you can ask your bank to sell them for you. Their 8) … will then depend on the market at the time you decide to sell. It may be a bit higher or lower than you bought at, but the 9) … in the value of bonds is never very great.

4. Match the questions on the left with the answers on the right.

1. So what exactly are bonds? a) Because of changes in the market. You can

2. And how do they work? sell them above or below par.

3. So you have to keep them b) No, not at all. Bonds are very liquid. They can

for a long time? be sold on the secondary market until they

4. Why should that happen? mature. But of course, the price might have

5. But the bond’s interest rate changed.

doesn’t change? c) No, not unless it is a floating rate bond. The coupon,

6. And people talk about AAA the amount of interest a bond pays, remains the

and AAB bonds, and things like that. same.

7. And what about gilts? d) That’s the name they use in Britain for long-term

government bonds – gilts or gilt-edged securities.

e) They are securities issued by governments and

companies when they need to borrow money.

f) Well, they usually pay a fixed rate of interest and

are repaid after a fixed period, known as their

maturity, for example 7, 10 or 15 years.

j) Yes. Bond-issuing companies are given an

investment grade by private rating companies

such as Standard & Poor’s, according to their

financial situation.

5. Read the text and translate it into Russian.

US Securities

There are securities issued by the federal government or a state or local government unit. Now and then governments have to borrow money from individuals and institutions because they cannot be financed entirely by taxes.

The most familiar US debt securities are US saving bonds (сберегательные облигации), which are non marketable securities, offered only to individuals and selected organizations. There is a limit to the amount that may be purchased by any person in a single year. Two types are available: pure discount bonds and bonds that pay interest semiannually but can be redeemed for par value at any time.

Treasury bills (казначейские краткосрочные облигации) are most often used to finance the government’s short-term debt. They have maturities up to one year and generally issued in denominations of $ 10000. They do not pay interest. But they are usually sold at a discount and therefore tend to be an attractive investment.

Treasury notes (казначейские среднесрочные облигации) and Treasury bonds (казначейские долгосрочные облигации) differ from Treasury bills in several ways. First, their maturities generally are greater than one year. Notes have maturities of one to seven years. Bonds can be sold with any maturity, but their maturities at issue typically exceed ten years. Second, bonds and notes specify periodic interest (coupon) payments as well as a principal repayment. Third, they are frequently registered, meaning that the government records the name and address of the current owner.

State and local governments issue State and Municipal notes and bonds when there is a need to finance some specific projects. Their face value is usually $ 5000, although it may vary depending on the project being financed The interest on these securities is paid from federal income taxes.

Corporate bonds are similar to other kinds of fixed-income securities and promise specified payments at specified dates. They have different degrees of risk. Bond rating agencies provide an indication of the relative default risk of bonds with rating that range from AAA (the best quality) to C (the lowest). Bonds rated BAA and above are typically referred to as “investment grade”. Below-investment-grade bonds are referred to as “junk bonds”(бросовые облигации).

6. Summarize the information of the unit and speak on the topic: The Stock Exchange, Bonds