1. Bonds are loans to local and national governments and to large companies. The holders of bonds generally receive fixed interest payments, once or twice a year, and get their money - known as the principal - back on a given maturity date. This is the date when
the loan ends.
2. Governments issue bonds to raise money and they are considered to be a risk-free investment. In Britain government bonds are known as gilt-edged stock or just gilts. In the US they are called Treasury notes, which have a maturity or 2-10 years, and Treasury bonds, which have maturity of 10-30 years. There are also short-term Treasury bills with the most common maturity of 3 months. T-bills in a country's own currency are generally the safest possible investment. They are usually sold at a discount from their nominal value - the value written on them - rather than paying interest. For example, a T-bill can be sold at 99% of the value written on it, and redeemed or paid back at 100% at maturity, three months later.
3. Companies issue bonds, called corporate bonds, because they can usually pay less interest to bondholders than they would have to pay if they raised the same money by a bank loan. These bonds are generally safer than shares, because if a company cannot repay its debts it can be declared bankrupt. If this happens, the creditors can force the company to stop doing business, and sell its assets to repay them. In this way, bondholders will probably get some of their money back.
4. Borrowers - the companies issuing, bonds - are given credit ratings by credit agencies such as Standard & Poors and Moody's. This means that they are graded, or rated, according to their ability to repay the loan to the bondholders. The highest grade (e.g. AAA, Aaa, A++) means that there is almost no risk that the borrower will default - fail to pay interest or to repay the principal. Lower grades (e.g. Baa1, BBB, C, etc.) mean an increasing risk of the borrower becoming insolvent - unable to pay interest or repay the capital.
Ex. 1 Decide whether the information is: True False Not stated
Usually bondholders do not receive fixed interest payments.
Ex. 2 Decide whether the information is: True False Not stated
Governments issue bonds when they need more money.
Ex. 3 Decide whether the information is: True False Not stated
Corporate bonds are given only to the workers of a particular corporation.
Ex. 4 Decide whether the information is: True False Not stated
The BBB rating is higher than the Aaa rating.
Ex. 5 In what paragraph (1, 2, 3, 4) is there the following information?
UK government bonds are known as gilts.
Ex. 6 In what paragraph (1, 2, 3, 4) is there the following information?
Credit ratings show the ability to repay the loan.
Ex. 7 Answer the following question: What Treasury certificates have the longest maturity date?
· Treasury bills
· Treasury notes
· Treasury bonds
· with the credit rating AAA
Ex. 8 What is the main idea of the text?
· Bonds enable their holders to receive fixed interest payments.
· Bonds are a means to raise money.
· Bonds have different maturity dates.
· Bonds issuers are given credit ratings.