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UNIT 6 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 of 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 conditions. Redeemable debentures are repaid on a fixed date or within a certain period of time.





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