3. Match the words and phrases.

1 investors	A the amount of a loan
2 issuing bonds	В borrowing money
3 principal	С date at which the money will be returned
4 maturity	D fall in interest rates
5 pension funds	E keep their bonds till maturity
6 buy-and-hold investors	F default
7 non-payment	G profits on the sale of assets
8 price appreciation	H providers of funds
9 price depreciation	I retirement money
10 capital gains	J rise in interest rates

4. Discuss the following questions.

1. What do you expect to happen to interest rates in your country (or continent) in the foreseeable future, and why?

2. Could you explain bond dealing to a child better than Sherman McCoy? If you work in business and have children, you might easily find yourself in the same situation as Tom Wolfe's character one day. How would you explain the following jobs to a six-year-old?

bond dealer	trade union organizer
personnel manager	internal auditor
stockbroker	market researcher

5. Read the text below and answer the following questions.

1. Why do most companies use a mixture of debt and equity financing?

2. Why do governments issue bonds?

Bonds

Companies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. More and more companies now issue their own bonds rather than borrow from banks, because this is often cheaper: the market may be a better judge of the firm's creditworthiness than a bank, i.e. it may lend money at a lower interest rate. This is evidently not a good thing for the banks, which now have to lend large amounts of money to borrowers that are much less secure than blue chip companies.

Bond-issuing companies are rated by private ratings companies such as Moody's and Standard & Poors, and given an 'investment grade' according to their financial situation and performance, AM being the best, and С the worst, i.e. nearly bankrupt. Obviously, higher the rating, the lower the interest rate at which a company can borrow.

Most bonds are bearer certificates, so after being issued (on the primary market), they can be traded on the secondary bond market until they mature. Bonds are therefore liquid, although of course their price on the secondary market fluctuates according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bond's yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a percentage of its price on secondary market.

For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. Apart from this 'tax shield', it is generally considered to be a sign of good health and anticipated higher future profits if a company borrows. On the other hand, increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures whereas companies are not obliged to pay dividends or repay share capital. Thus, companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors.

Governments, of course, unlike companies, do not have the option of issuing equities. Consequently they issue bonds when public spending exceeds receipts from income tax, VAT, and so on. Long-term government bonds are known as gilt-edged securities, or simply gilts, in Britain, and Treasury Bonds in the US. The British and American central banks also sell and buy short-term (three month) Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation; to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way.