Introduction to Finance

LEARNING ACTIVITY
Examine recent fi nancing activity and data at the Federal Reserve Board and Securities 
Exchange Commission websites, http://www.federalreserve.gov and http://www.sec.gov.
10.2
Bonds
A 
bond 
is an agreement or contract between lenders and the borrowing organization; typically, 
a fi rm or government body. As such, the lenders or bondholders of a corporation have certain 
rights and privileges not enjoyed by the fi rm’s owners (those holding shares of common stock). 
A debt holder may force the fi rm to abide by the terms of the debt contract even if the result is 
reorganization or bankruptcy of the fi rm. The periodic interest payments due to the holders of 
debt securities must be paid or else the creditors can force the fi rm into bankruptcy. 
Table 10.1
summarizes important characteristics of bonds, which we’ll be reviewing in this section.
GLOBAL
Except for rarely issued perpetuities,
2
all debt issues have maturity dates, the point 
when issuers are obligated to pay the bond’s principal (
par value (debt); face value
) to bond-
holders. In the United States, par value is usually $1,000 for corporate bonds. All but zero-
coupon issues pay interest, called 
coupon payments
. If a bond has an 8 percent coupon and 
a par value of $1,000, it pays annual interest of 8 percent of $1,000, or 0.08 × $1,000 = $80. 
A bond with a 10 percent coupon would pay interest of $100 per year. Eurobonds pay a single 
annual coupon interest payment. In the United States, bonds pay interest semi-annually; an 
8 percent coupon will pay interest of $40 every six months during the life of the bond.
bond 
agreement or contract 
between investor (lender) and 
a debtor (borrower), typically a 
business fi rm or government body