Match up the following words and definitions.

blue chip defensive stock growth stock insider share-dealing

institutional investors mutual fund market-maker portfolio stockbroker

1 a company that spreads investors' capital over a variety of securities

2 an investor's selection of securities

3 a person who can advise investors and buy and sell shares for them

4 a stock in a large company or corporation that is considered to be a secure investment

5 a stock - in an industry not much affected by cyclical trends - that offers a good return but only a limited chance of a rise or decline in price

6 a stock - which usually has a high purchasing price and a low current rate of return — that is expected to appreciate in capital value

7 a wholesaler in stocks and shares who deals with brokers

8 financial organizations such as pension funds and insurance companies which own most of the shares of all leading companies (over 60%> and rising)

9 the use of information not known to the public to make a profit out of buying or selling shares

Vocabulary

Match up the words or phrases on the left with the corresponding ones on the right.

1 investors A the amount of a loan

2 issuing bonds B borrowing money

3 principal C 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

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, AAA being the best, and C the worst, i.e. nearly bankrupt. Obviously, the 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 its1 coupon (the amount of interest it pays) expressed as a percentage of its price on the secondary market.

For companies, the advantage of debt financing over equity financing is that bond1 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 J 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. Thud 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, are 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.