Corporate Bonds: Description and Characteristics

This article provides a detailed description of corporate bonds, including their characteristics and how they are used to finance restructuring. It also highlights the importance of corporate bonds in raising funds for businesses.

Global finance
institutions & Markets

Table of Contents
INTRODUCTION...........................................................................................................................4
QUESTION 1...................................................................................................................................4
A. Government intervention in financial market with suitable examples:..................................4
b. Effects of a stimulative monetary policy:................................................................................5
REFERENCES................................................................................................................................6
QUESTION 2...................................................................................................................................7
A. Discussion on Money markets enable financial market participants to maintain liquidity:...7
REFERENCES................................................................................................................................7
QUESTION3....................................................................................................................................8
A. Bonds:.....................................................................................................................................8
B. Institutional participation in bond markets:............................................................................8
C. Bond yields:.............................................................................................................................9
D. Treasury and federal agency bonds:........................................................................................9
E. Municipal bonds:.....................................................................................................................9
REFERENCES................................................................................................................................9
QUESTION 4.................................................................................................................................11
A. Describe corporate bonds:.....................................................................................................11
B. description of the characteristics of corporate bonds:..........................................................11
C. how corporate bonds finance restructuring:.........................................................................11
REFERENCES..............................................................................................................................12
QUESTION 5.................................................................................................................................13
A. Methods of valuation of stock exchange:.............................................................................13
B. measure the excess return above the risk-free rate per unit of risk (Sharpe Index):.............13
REFERENCES..............................................................................................................................14
QUESTION 6.................................................................................................................................15
A. Initial public offerings...........................................................................................................15
B. Process of going public.........................................................................................................15
C. Underwriter efforts to ensure price stability.........................................................................15
D. Initial returns of IPOs............................................................................................................15

E. Abuses in the IPO market......................................................................................................16
REFERENCES..............................................................................................................................16
CONCLUSION..............................................................................................................................17

INTRODUCTION
Financial institution is the company which is dealing in financial and monetary terms
such as transactions deposits, loans, investments and currency exchange. It contains a broad
range of business operations with financial service industries such as banks, non banking
companies, trust, insurance, brokerage and investment dealers. It is the intermediary between
consumers and the capital providing by banks and investment services. It is responsible for the
supply of money in the market through transfer of funds from the investors to the companies by
loans, deposits and investments. Global financial market includes the market that is deal in
foreign exchange and related to money markets. This report covers topics such as government
intervention in financial markets, stimulative monetary policy, money market, facilities provided
by bond market and corporate bonds. Apart from this it also covers topics such as stock
exchange and valuation of stocks, risk and return and IPOs.
QUESTION 1
A. Government intervention in financial market with suitable examples:
Financial market refers to which deals in financial assets such as shares, debentures and
bonds in terms of buy and sell it. Funds are transfer in financial market when one party buy
financial assets which is previously held by another party.
Role of financial markets:
 Financial market provides funds from investors to those who need for it.
 It helps corporates in order to fulfill their financial needs that can be, the market is
mediator between corporates and investors for fund management.
 It allows investors to expand their business as well as investors to achieve higher return.
 It helps in investment management activity and corporate finance activity.
Government intervention in financial markets: In recent years, government has
increased its role in financial markets. The government is influencing all aspects of the financial
institutions. Government rules and policies make impacts on overall economy that directly
affects the financial market and institutions. Government rules may affects financial activities of
any business. The impact can be done by government laws, tax policies, central bank activities
and accounting standards (Collingro and Frenkel, 2020).

 Central banks: central banks works in control to money supply and inflations by using
country base interest rate. Central bank sets interest rate in which banks can borrow
money from its. The rate set by it not only for banks but also considered by other
financial institutions. Higher interest rate can downfall in economy and lower interest
rates can help economic growth by individuals and businesses both because at lower
interest rate they can borrow money easily and it helps them to expand their businesses.
 Government tax policies: The government tax policies affects the businesses and
aspects of economy. It dictates the way businesses conduct their activities and investors
handles their investments (Kenourgios, Drakonaki and Dimitriou, 2019). For example,
lower tax rate will encourage the investors to invest in business more. Low tax rates and
policies attracts businesses in order to run their activities in other countries.
 Government laws and regulations: Government controls the activities of financial
institutes and sets rules and regulations under which businesses has to runs their
activities. The Dodd-frank act applies on banks regulations, that imposing various
investments restrictions and trading.
Government policies extends on overall financial world, that affects individual and
businesses. It affects companies in such a way in which companies do business and the way
individuals spend , save and invest their money into business activities.
b. Effects of a stimulative monetary policy:
Monetary policy refers to activities govern by central bank in order to control money
supply and achieve sustainable growth. It is the macroeconomic policy that is undertaken by
central government. The federal reserve monetary policy helps in promoting employment, stable
prices and managing long term interest rates for loan borrowings. Every investor should have
knowledge about it, as it can impact on investment portfolios and net worth. In addition of
money in the economy, effected by lower interest rates and that maybe cause for business
expansion and consumers spending that leads to economic growth (Rüth, 2017).
The liquidity situation in monetary policy affects businesses because policy makers
influence the interest rates in the nation because of altering nominal money supply. Fluctuations
in monetary policies will negative effects on the businesses.

REFERENCES
Books and journals:
Collingro, F. and Frenkel, M., 2020. On the financial market impact of euro area monetary
policy: A comparative study before and after the Global Financial Crisis. Global
Finance Journal. 45. p.100480.
Kenourgios, D., Drakonaki, E. and Dimitriou, D., 2019. ECB’s unconventional monetary policy
and cross-financial-market correlation dynamics. The North American Journal of
Economics and Finance. 50. p.101045.
Rüth, S. K., 2017. State-dependent monetary policy transmission and financial market tensions.
Economics Letters. 157. pp.56-61.

QUESTION 2
A. Discussion on Money markets enable financial market participants to maintain liquidity:
Money market enables financial markets to maintain liquidity:The term money can
be used as complex arrangement of money by which borrowers of money and lenders and other
in the form of equity capital. In other words, money market refers to by which outstanding bonds
and obligations buy and sales (Kaffash and Marra, 2017). It is organised exchange market where
participants borrows short term and long term securities. It allows governments, banks and other
financial institutes to sell their long term securities in order to funds their short term financial
needs. Various instruments which are traded in money market includes treasury bills,
commercial papers, federal funds, bills of exchange, certificates of deposits and short term
mortgage backed securities and asset backed securities. Money market provides source for
financial market participants to main their liquidity in order to provide arrangement for buying
and selling securities that helps firms to expand their business and investors to get income by
getting interest (Sauer, 2016).
As the commodity, money market becomes element of financial market for assets which
is involves short term borrowings, lending, buying and selling with maturity. Money market
enables financial market in order to maintaining liquidity for the global financial system which
includes capital markets that is part of financial markets. It provides short term liquidity to
financial institutions so that they maintain liquidity in order to provide loans to customers
(Schmidt, Timmermann and Wermers, 2016). It allows financial institutions to keep deposits
near themselves.
REFERENCES
Books and journals:
Kaffash, S. and Marra, M., 2017. Data envelopment analysis in financial services: a citations
network analysis of banks, insurance companies and money market funds. Annals of
Operations Research. 253(1). pp.307-344.
Sauer, B., 2016. Virtual currencies, the money market, and monetary policy. International
Advances in Economic Research. 22(2). pp.117-130.
Schmidt, L., Timmermann, A. and Wermers, R., 2016. Runs on money market mutual funds.
American Economic Review. 106(9). pp.2625-57.

QUESTION3
A. Bonds:
Bond represents the income instrument by a loan which is made by investor in context to
borrowers. Bonds are used by companies, states, municipalities and governments to finance
projects and businesses. Owners of the bonds are known as creditors and debt holders and the
next party which represents bonds known as issuers. Government commonly issues bonds to
borrow money by public when it needs for fund in roads, schools, dams and other infrastructure
activities (Goldstein and Hotchkiss, 2020). The most common bonds are municipal and corporate
bonds. It has fixed and floating interest rates for the maturity period. Bonds interest rates known
as coupon rates.
B. Institutional participation in bond markets:
Bond market participants are almost similar to the financial markets participants. Buyer
of fund are debt issuer and seller of funds are institution of funds and may both. Participants
includes institutional investors, traders, individuals, governments etc. government when deals
with any infrastructure project and needs for funds they issues bonds for borrowing funds from
public. Players involved in bond market such as bond issuers, bond underwriters, bond
purchasers.
 Bond issuers: The issuers sells bonds and various debt instruments in the bond market by
funding organisation for running their activities, expand business and merger and
acquisitions. The market mainly includes governments, banks and corporations. The
biggest issuer is government, which uses bond market for countries infrastructure.
 Bond underwriters: The underwriting segment in the bond market is made up by
investment banks and various financial institutions which helps the issuer firms to sell
their bonds to the public.
 Bond purchasers: Bond purchasers are the main player in bond market, even bond
market is run for them. Bond purchasers refers to the who are buying bonds by
corporation by giving them funds these are called as investors. Government plays vital
role in it because they borrow and issues money to different governments.

C. Bond yields:
Bond yield refers to the return on issuing bonds. Basically it is about, when the
government and any institutions issuing bonds in public they give some percentage of return to
them for the maturity date that return refers to bond yields (Morana and Sbrana, 2019). It can be
defined in various ways:
 Bond yield to price: When the price of the bond is increases, bond yields falls and when
the price of the bond is decreases, bond yields rises.
Current yield = Annual coupon payment / bond price
 Yield to maturity: A bonds yield to maturity refers to equality to the interest rates which
makes the present value of all bonds with future cash flows which refers its current price.
Price = Cash flows^t / ( 1 + YTM )^ t
D. Treasury and federal agency bonds:
Treasury bonds are government debt securities which is issued by U.S. Federal
government that have maturity for more than 20 years. It is also known as T-bonds that earns
interest at periodic manner until maturity date.
A agency bond is security that is issued by enterprises which is governed by government
and by the federal government department rather than U.S. Treasury. An agency bonds issued on
fixed and variable interest rates. These bonds are very secure and has full faith and credit of the
US government.
E. Municipal bonds:
Municipal bonds are also known as muni bonds which is issued by local government and
territories. Basically, it is used to public projects in order to finance them projects such as
schools, colleges, roads, airports and other infrastructure activities (Neyland, 2018). These types
of bonds are exempt from federal taxes and most of states tax making them attractive to people
in high income tax. Municipal bonds are categorized on the basis of interest rates and principle
payments. A bond can be structured in various ways risks, tax and benefits.
REFERENCES
Books and journals:
Goldstein, M. A. and Hotchkiss, E. S., 2020. Providing liquidity in an illiquid market: Dealer
behavior in US corporate bonds. Journal of Financial Economics. 135(1). pp.16-40.

Morana, C. and Sbrana, G., 2019. Climate change implications for the catastrophe bonds market:
An empirical analysis. Economic Modelling. 81. pp.274-294.
Neyland, D., 2018. On the transformation of children at-risk into an investment proposition: A
study of Social Impact Bonds as an anti-market device. The Sociological Review. 66(3).
pp.492-510.

QUESTION 4
A. Describe corporate bonds:
Corporate bonds refers to debt security which is issued by firms and sold to investors in
context to managing funds into the businesses. In this company is gets money and pays pre
estimated interest to investors, interest rates can be fixed and variable. These bonds is issued by
corporations in order to raising funds for ongoing activities, merger and acquisition and expand
businesses. Basically, this term is applied on longer term debt instruments which has longer term
maturity. It is essentially mutual funds which invests more than 80% of their total finance in
corporate bonds (Chen and et.al., 2018). High quality of corporate bonds are more secure and
better investment. As per this, it has higher interest rates than municipal and government bonds.
Before issuing bonds to investors bonds overview as credit worthiness of the issuer which is
review by one and more US rating agencies.
B. description of the characteristics of corporate bonds:
 It has various characteristics which are mentioned below:
 Face value: Basically, corporate bonds have per value 1000$ and this amount can be
much greater for government bonds. For example if a bond has value of it $1000 per
bonds it is face value for the bonds.
 Interest: Bond issuing corporates pays interest to investors on fixed and variable rates, it
can be pay by the monthly, quarterly and annually. For example, if the 10% interest rate
applied on $1000 per bonds, the $100 will be its interest amount.
 Coupon and interest rates: Coupon rate refers to interest amount that is paid to investor
for maturity period. For example, if interest is $100 and price is $1000 then coupon rate
which pay to the investor will be $1100 per bonds.
 Maturity: Maturity shows the period for which bonds are issued by corporates, it can be
for short term period and long term period. The longer the maturity period higher the
interest rate, As longer period interest rates fluctuates more than shorter period bonds.
C. how corporate bonds finance restructuring:
Corporate debt restructuring is the process of realignment of a business in the distress due
to its outstanding commitments and obligations for refusing liquidity into business activities.
This activity is done by the creditors and by the management team of the company. Creditors

refers to generally banking and non banking financial firms. The corporate restructuring process
is done by the lowering the amount of payables in order to pay their debts. This arrangement Is
better for companies rather than declare themselves to be bankrupt. In this type of situation
interest rates also lower and repayment tenure is enhanced which helps firms in order to pay their
outstanding dues. It will increase efficiency of the company and make stress free. It can be good
idea if firms having troubles in affording payments. This process is totally depends on the type of
institute financial situation and types of debts. For example, if any organisation is not able to pay
their loans at the time of payment and they have not enough money to pay than under this it
provides them lower interest rate and more time to pay their loans. There are various ways that
debt restructure can benefit businesses that are mentioned below:
 Consolidate all debts to a single lender: Small businesses takes debts by different
organisations but it will be typical to manage these debts. Consolidation of debts helps
firms to manage their cash flows as payments are made unity.
 Access equity or free up cash in your business: Debt restructure allows businesses to
keep access equity with them that is used to expand business (Goldstein, and Hotchkiss,
2020).
 Lower interest rates: Debts restructure provides benefits to company as it allows it to
pay at lower interest rates that makes easy for borrowers to pay debts in fasts manner.
REFERENCES
Books and journals:
Chen, H., and et.al., 2018. Quantifying liquidity and default risks of corporate bonds over the
business cycle. The Review of Financial Studies. 31(3). pp.852-897.
Goldstein, M. A. and Hotchkiss, E.S., 2020. Providing liquidity in an illiquid market: Dealer
behavior in US corporate bonds. Journal of Financial Economics. 135(1). pp.16-40.

QUESTION 5
A. Methods of valuation of stock exchange:
In financial markets, stock valuation refers to calculation of theoretical values of the
companies and its shares. The main use of these methods is used to predict future market prices,
potential market prices and profits from them. There are various method for calculating stocks
prices. The two share valuation methods are absolute valuation and relative valuation.
Absolute valuation, this method mainly focuses on finding the intrinsic value of a stock.
Intrinsic value refers to the true value of a stock and it has two methods, known as dividend
discount model and discounted cash flow model.
 Dividend discount model: This model is refers to the theory that means the sum of all its
future dividends. It is the quantitative model used for predicting the price of the stock that
its current worth the sum of its future dividends (Reboredo and Ugolini, 2020).
 Discounted cash flow model: According to this model, firm can calculate the actual
value of its stock as per the future cash flows. This analysis doing for knows value of
investment in current period which is based on projections of how much money it will
generate in the future.
Relative valuation, in this method firms compare its stocks with relative assets value than
setting the price of the assets. This method includes various techniques in order to calculating
stock prices, earning for growth, book value, price value and price cash flow.
 Price earning: It is about amount which is investor willing to pay for each rupees of
firms earning (Zhang, Hu and Ji, 2020). A stock which has higher price earnings it leads
to investors have higher expectations for earning of the company.
 PEG ratio: It reflects the relationship between current market value of the firm and its
projected earnings growth. If this ratio comes less than 1 that leads to undervalued and
more than 1, it shows overvalued.
PEG = P/E / Earnings growth rates
B. measure the excess return above the risk-free rate per unit of risk (Sharpe Index):
Average return for A stock =16%
Average return for B stock = 14%
Average risk-free rate = 10%

Standard deviation of Sooner stock returns = 15%
Standard deviation of Longhorn stock returns = 8%
Sharpe Index =
R= Average return of the stock
Rf = Average risk free rate
= Standard deviation of the stock's return
For A stock:
= .16 - .10 / .15
= .4
For B stock:
= .14 - .10 / .08
= .5
As per the above data it shows risk and returns involved in stocks, there are two stocks
such as stock A and stock B. stock A shows average risk was .10 and return involved is .16 with
the standard deviation on stock return is .15 after the using all these Sharpe index for the stock A
is .4. And as per the stock B calculation it shows .5 its Sharpe index.
REFERENCES
Books and journals:
Reboredo, J. C. and Ugolini, A., 2020. Price connectedness between green bond and financial
markets. Economic Modelling. 88. pp.25-38.
Zhang, D., Hu, M. and Ji, Q., 2020. Financial markets under the global pandemic of COVID-19.
Finance Research Letters, p.101528.

QUESTION 6
A. Initial public offerings
Initial public offering could be defined as the procedure which is followed by entities
while offering their shares to the public. With the help of it, the businesses can raise funding
from the public investors (Gilbert and et. al., 2020). It can help the private company to become
public by selling the financial assets to the public. When shares will be offered to general public
then after wards all of them will be traded in the open market. All those shares could be sold by
investors with the help of secondary market trading. It is very important for the growth of many
businesses because it provides access to the public capital market and increase level of exposure
and credibility.
B. Process of going public
If a private company will be willing to go public, then it could be done with the help of
initial public offering. Main purpose of becoming a public company is to raise funds for carrying
out operations in future. In order to introduce shares to general public it is very important for all
the businesses to select a bank firstly and then look for due diligence and filings. Afterwards,
prices are decided for the shares to attract public. When price will be set for the shares then all of
them will be stabilized and at the end transition to market competition for the shares will be
performed.
C. Underwriter efforts to ensure price stability
Underwriting could be described as the process which in which an institution or
individual takes financial risk for a specific compensation. The person who is taking the risk is
known as underwriter. It is the main responsibility of the individuals to make efforts to ensure
the price stability. For this purpose, underwriter tries to verify the asset properly and analyse the
credit score of it so that optimum quantity of security could be underwritten. The efforts that are
made by underwriter to ensure price stability includes proper analysis of security, effective
estimation of future value of asset etc.
D. Initial returns of IPOs
Initial return could be described as the difference between IPO’s offer prices and the
closing market prices on the very first day of trading in the secondary market. It is total return on
the offer price of stock for the first day of trading. When the initial return for a stock will be high

then the decision of making investment in the asset will be taken, if it will be low then the
investor will ignore the asset to make investment.
E. Abuses in the IPO market
There are various types of abuses may take place in future. These are spinning, laddering
and excessive commissions. Spinning may occur when the underwriter will allocate securities to
corporate executives through IPO. Laddering is when there is substantial demand for an Initial
Public Offer then some brokers can engage in this abuse. When some brokers charge excessive
commission for the high demand securities then it will also be considered as the abuse in IPO
markets (Kotlar and et. al., 2018).
REFERENCES
Books and journals:
Gilbert, C. R., and et. al., 2020. Management of indwelling tunneled pleural catheters: a modified
Delphi consensus statement. Chest.
Kotlar, J., and et. al., 2018. Financial wealth, socioemotional wealth, and IPO underpricing in
family firms: A two-stage gamble model. Academy of Management Journal. 61(3).
pp.1073-1099.

CONCLUSION
From the above report it has been concluded that financial institutions refers to the
company which deals as banking, share market, NBFCs etc. It helps firms to expand their
business and make profitable to it. It is responsible for the supply of money in the market
through transfer of funds from the investors to the companies by loans, deposits and investments.
Money market refers to where the securities and commodities are buy and sales. Bonds are the
income source and type of security in which various financial corporations issuing it at interest
rate which is pay to the investors. Corporate bonds refers to debt security which is issued by
firms and sold to investors in context to managing funds into the businesses. Stock valuation is
the method of calculation market value and share price of company. Basically financial
institutions provides securities to investors to get money for business such as shares, bonds,
debentures etc.