Leasing:

A written agreement under which a property owner allows a tenant to use the property for a specified period of time and rent.

The lessee (person taking out a lease) agrees to pay a number of fixed or flexible installments over an agreed period to the lessor, who remains the owner of the asset (item) throughout the period of the lease.

TYPES OF LEASING: Lease agreements are basically of two types. They are (a) Financial lease and (b)Operating lease. (c) Sale and lease back (d) Leveraged leasing and (e) Direct leasing.

FINANCIAL LEASE Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as 'capital lease'. In India, financial leases are very popular with high-cost and high technology equipment. Example: AB company takes a new automobile on lease for three year. At the end of three years, the AB company will be called to take the ownership of vehicle at no extra cost. Here not only

the vehicle is taken on lease but also the AB company is using the lease agreement as a means of financing the automobile

OPERATIIONAL LEASE: An operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. Example : MY enterprises owns a complete 6th floor in Eden Tower. They gives some rooms of this floor on lease to XY corporation.

Now if the value of this building increase due to good business activity then the lessor i.e., MY enterprises can take the benefit of this increase by either selling out the rooms or by increasing the rental amount. On the other hand if the building decreases in value than also the MY enterprises will be the sufferer of loss

SALE AND LEASE BACK: It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable for those assets, which are not subjected depreciation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement.

4)LEVERAGED LEASING: Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset. Example suppose a car dealer (lessor) extends a lease to someone buying a car (leasee). The lessor may take a loan from a bank in order to receive capital from the lease of the car while the lessee drives away with the car. The lessee then makes payments on the lease, which the lessor then uses to repay the loan to the bank. Importantly, the lessor may take the leased asset away from the lessee if the lessee defaults, and the bank may do the same if the lessor defaults. 5 DIRECT LEASING: Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc

Advantages of Leasing The total financing of the investment objects which leads to a reduced own financial effort. Therefore, the supplementary financial resources can be used for the other investment projects or simply for maintaining an increased liquidity; Leasing proves to be a perfect alternative for obtaining equipment of a high complexity and technicality, for which the moral depreciation has a high percent, allowing the operative exchange of some morally depreciated equipment; The rapidity of the approval of the operation process; The accounting operations for the leasing contract: for the beneficiary only the registration to the expenses of the royalties, which makes the balance sheet of the company not to modify and also gives the possibility of contracting some credits; The constant amount of the royalty enables the easy scheduling of the expenses;

 There is not necessary any supplementary guarantee, the object of the leasing contract being in itself a guarantee. Disadvantages of Leasing

The leasing is efficient only if the equipment can be operated over the whole period of the contract; not using this equipment over the whole period of the contract, mainly due to the lack of orders, leads to losses for the beneficiary;

In case the lessee could obtain a bank credit under advantageous conditions, the cost of leasing would be higher;

The good that makes the object of the leasing contract doesn't belong to the lessee, and therefore he cannot sell it during the period of the contract, and the sublease can be accomplished only with the owner's agreement;

Through leasing only the usage right is given away, the ownership right being kept, but therefore the supplier's goods can be damaged by improper usage, after the first lease being possible that the good will not find other users.

Legal aspects of Leasing:

The lessor has the duty to

Deliver the asset to the lessee

Authorize the lessee to use the asset

Leave the asset in peaceful possession

The lessee has the obligation to o Pay the lease rentals o Protect the lessors title o Take reasonable care of the asset

o Return the leased asset

Comparison of buying and leasing:

There are many distinct differences between buying and leasing, regardless if such a transaction or agreement applies to property, machinery, equipment or other assets. The difference lies in that a lease is conceptually very similar to the principle of borrowing. The ownership of the leased property (be it land, equipment, merchandise, or etc.) is not transferred under the terms of the lease agreement. The lease gives the lessee the right to use the assets covered under the agreement for the duration of the contracted term, however, upon the completion of said term the lessee is required to return the assets in question to the lessor, thereby completing the terms of the agreement. In a general example having to do with an automobile lease, the vehicle is due back to the dealership at the conclusion of the lease term. Once the vehicle is returned, the automobile lease agreement is completed and the parties (lessor and lessee) separate with no further obligations to each other (assuming there is no damage on the vehicle entitling the dealer to some further compensation). The lessee has no further claim or right to use the vehicle and the lessor, or car dealer no longer collects any payment from the former lessee the previous driver. Many lease agreements contain clauses and addendums that outline additional rights, or options for the lessee, to be exercised at will upon the conclusion of the lease (there are numerous equipment lease types with individual features). In automobile leases as a general example, a lessee may have an option to purchase the vehicle, thereby restructuring the agreement and ultimately obtain the ownership of the asset previously leased. In the example of a property lease, the renter (or lessee) may have the option to extend the lease, under predetermined terms. Such scenarios are numerous and are typically pre-set during the initial creation and negotiation of the agreement between the parties. Purchasing, on the other hand, involves an agreement that outlines the terms under which the purchaser acquires ownership of the desired item, property or asset. The purchase agreement delineates the purchase price and the terms under which it is to be paid for by the buyer. The overall purchase price can be amortized over a period of time as in the case of financing, or it can be paid in full, resulting in the instant transfer of ownership to the purchaser. In the event

that the purchase is financed over a period of time, the ultimate price paid for the item or asset can be greater than the original price due to interest. For an individual deciding between buying or leasing, it is crucial to understand the pros and cons of each.

Responsibility: In a scenario involving business entities that typically rely on functional equipment for on going operations and to stay ahead of competitors, responsibility is a key factor. In a purchase, the responsibility for the equipment falls solely on the shoulders of the business owner. While there are various insurance plans and warranties available to protect the owners, in case of damage or faulty manufacturing, the ultimate responsibility for the life of the equipment, after a purchase is complete, falls on the buyer. In a lease scenario, a lessee is only responsible for the equipment for the duration of the lease and while he or she remains in possession.

Resale value: In case of a purchase, the full value of the asset is transferred to the purchaser, as the new owner. This means that in case of resale at a subsequent time, the full price for which the asset is resold can be collected by the new owner. In case of an automobile purchase, for example, an individual can, at a later date freely resell the vehicle and collect its value, albeit a depreciated amount from the original purchase price. In a lease, the lessor has no claim to the asset upon the conclusion of a lease, thereby the monies that were paid in the course of the lease cannot be, in part or in whole be recouped through a resale of the asset.

Depreciation: Depreciation is a major consideration for individuals deciding between buying and leasing. For assets that suffer from significant depreciation, either as a result of regular wear and tear or through becoming obsolete upon the release of newer versions of the same materials (particularly applicable in the case of technology) leasing can prevent a significant loss of value. In business, there exists a basic rule of thumb: If it appreciates, buy it. If it depreciates, lease it. Leasing could permit the use of the equipment while it is new and upon the completion of the lease, it can be simple to upgrade by virtue of a new lease. In case of a purchase, however, an individual may be stuck with an obsolete asset with no means of recouping the cost of its acquisition.

Maintenance: Because in the instance of a lease the ultimate ownership is retained by the lessor, it is in the lessors best interest to maintain the asset in its best working order. Therefore, lessees can often benefit from comprehensive maintenance programs offered by lessors while still paying a discounted premium due to the fact that the asset is being leased, not purchased.

Cost: In the event of a purchase, the full value of the asset must be paid to the seller. In the event of a lease, however, only a portion of the full value is assessed, typically around 50%, however the figure varies based on the duration and type of lease. As a consequence, a lessor can gain the use of a much needed asset for a fraction of the full price of ownership. In many instances, this can better serve the lessee that an outright purchase would. As a corollary, a lessor could be granted the use of an asset that could otherwise be cost prohibitive.

VENTURE CAPITAL MEANING: Venture capital means funds made available for startup firms and small businesses with exceptional growth potential. Venture Capitalists generally: Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation. DEFINITION: The SEBI has defined Venture Capital Fund in its Regulation 1996 as a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations. CHARACTERISTICS: Long time horizon High risk Equity participation

 Participation in management Lack of liquidity ADVANTAGES: It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations. The venture capitalist also has a network of contacts in many areas that can add value to the company. The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth. Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ. They can also facilitate a trade sale. VENTURE CAPITAL INVESTMENT PROCESS:

METHODS OF VENTURE FINANCING: The financing pattern of the deal is the most important element. Following are the various methods of venture financing: Equity Conditional loan Income note Participating debentures Quasi equity EXIT ROUTE FOR VENTURE CAPITALISTS: Initial public offer(IPOs) Trade sale

 Promoter buy back Acquisition by another company DEVELPOMENT OF VENTURE CAPITAL IN INDIA The concept of venture capital was formally introduced in India in 1987 by IDBI. ICICI started VC activity in the same year. Later on ICICI floated a separate VC company TDICI VENTURE CAPITAL FUNDS IN INDIA VCFs in India can be categorized into following five groups: 1) Those promoted by the Central Government controlled development finance institutions. For example: - ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL) 2) Those promoted by State Government controlled development finance institutions. For example: - Punjab Infotech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd. 3) Those promoted by public banks. For example: - Canbank Venture Capital Fund - SBI Capital Market Ltd

4)Those promoted by private sector Companies. For example: - IL&FS Trust Company Ltd - Infinity Venture India Fund 5) Those established as an overseas venture capital fund. For example: - Walden International Investment Group - HSBC Private Equity - management Mauritius Ltd How does the Venture Capital work? Venture capital firms typically source the majority of their funding from large investment institutions. Investment institutions expect very high ROI VCs invest in companies with high potential where they are able to exit through either an IPO or a merger/acquisition. Their primary ROI comes from capital gains although they also receive some return through dividend. FUTURE PROSPECTS OF VC IN INDIA VC can help in the rehabilitation of sick units. VC can assist small ancillary units to upgrade their technologies. VCFs can play a significant role in developing countries in the service sector including tourism, publishing, health care etc.

 They can provide financial assistance to people coming out of universities, technical institutes, etc thus promoting entrepreneurial spirits.

ADR, GDR What is ADRs? AMERICAN DEPOSITORY RECEIPTS ALTERNATIVE DISPUTE RESOLUTION Depositary Receipts (DR) Type of negotiable (transferable) financial security. Traded on a local stock exchange. Physical certificate allowing investors to hold shares in equity of other countries.

BENEFITS OF DEPOSITARY RECEIPTS (DR): For the Company Raise capital from foreign markets. Increases the share liquidity. For the Investor Investors gain the benefits of diversification. Investors will be able to reap the benefits of foreign(emerging) markets American Depository Receipt (ADR): The first ADR was first introduced by J. P. Morgan in 1927 for the British retailer Selfridges. Shares of many non-US companies trade on US stock exchanges, ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock

Types of ADR Programes: Sponsored level 1 ADRs, Sponsored level 2 ADRs, Sponsored level 3 ADRs, Un Sponsored ADRs, Restricted Programs, Privately Placed and Offshore. WORKING OF ADR: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4). These receipts are then sold to the people of this foreign country. These receipts are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. There are three level in sponsored program Level 1 Lowest level of sponsored ADR When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent. Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S.SEC Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants a Level 2 program, it must file a registration statement with the U.S. SEC . In Level 2, the shares can be listed on a U.S. stock exchange. These exchanges include the NYSE, NASDAQ, and the AMEX.

 A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies. Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital UNSPONSORED PROGRAMME: Unsponsored shares trade on the over-the- counter (OTC) market. Unsponsored ADRs are often issued by more than one depositary bank RESTRICTED PROGRAMME: Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs

PRIVATELY PLACED (SEC RULE 144A) ADRS: ADR program under SEC Rule 144A- private placement, restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs) OFFSHORE (SEC REGULATION S) ADRS: Shares are not, and will not be registered with any United States securities regulation authority. The shares are registered and issued to offshore, non-US residents. ADVANTAGES OF ADRS: It helps investors to invest in big foreign companies and are good instruments for portfolio diversification. They help the investors to profit from many emerging market companies (high risk high return instruments). All transactions including buying the shares, dividend payments and capital gains are done in U.S. Dollars. The competitive rates of Euro and U.S. Dollar over other market currencies also benefit the investor. ADRs offer more transparency and stability than trading the stock directly in a foreign market.

GRD The Global Depositary Receipt is a Financial Instrument . A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank.

GRD Market: 1. London Stock Exchange, 2. Luxembourg Stock Exchange, 3. Dubai International Financial Exchange (DIFX), 4. Singapore Stock Exchange, 5. Hong Kong Stock Exchange. DIFFERENCE BETWEEN GDR AND ADR : Global depository receipt is compulsory for foreign company to access in any other countrys share market for dealing in stock. But American depository receipt (ADR) is compulsory for non us companies to trade in stock market of USA . ADRs can get from level -1 to level III. GDRs are already equal to high preference receipt of level II and level III. Indian companies prefer to get GDR due to its global use for getting foreign investment for own business projects. GDR is negotiable instrument all over the world but ADR is only negotiable in USA . Even both GDR and ADR is the proxy way to sell shares in foreign market by India companies ADRs is not substitute of GDRs but GDRs can use on the place of ADRs . American investors typically use regular equity trading accounts for buying ADRs but not for GDRs .

Hire purchase
A system by which a buyer pays for a thing in regular installments while enjoying the use of it. During the repayment period, ownership (title) of the item does not pass to the buyer. Upon the full payment of the loan, the title passes to the buyer. UK term; the usual US term is installment buying.

Implied warranties and conditions to protect the hirer * The hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract.

*the owner will be able to pass title to, or ownership of, the goods when the contract requires it ADVANTAGES OF HIRE PURCHASING Facility of buying People with small income can buy expensive articles such as car, house, furniture, etc. They can make payment in easy installments standard of living. The buyer can return the goods if he is not satisfied with their quality or is unable to pay further installments. Thrift and savings Hire purchase system encourages people to reduce expenses and save money to pay installments at regular intervals. Higher sales Hire purchase system helps to widen market for costly goods. People who cannot buy such goods otherwise are tempted to purchase them on installments. The seller can take back the goods if buyer makes default in payment. Boon to small producers Small scale units and farmers can buy machinery and equipment and pay installments out of earnings. For example, an unemployed graduate can buy a taxi through hire purchase, earn money from the taxi and pay installments out of such income. 1. Extravagance: and thereby improve their

Hire purchase system induces middle class people to buy luxury goods which they cannot otherwise afford. They are tempted to pledge their future income. They may not be able to pay installments in time. They suffer heavy loss when the seller takes back the goods on default of payment. 2. Higher prices: The buyer has to pay much higher prices than that payable on cash purchase. The seller adds a margin to cover interest and risk. The seller may pass on goods of doubtful quality by offering easy credit terms. The buyer does not get ownership of goods until last installment paid. He cannot sell the goods before final payment. 3. Risk of bad debts: When the buyer fails to pay installments, the seller may suffer loss. He may have to spend money and time to recover goods from the buyer. 4. Large investment: The hire purchase seller has to invest considerable funds because payments are received from buyers over a long period of time.

Disadvantages of hire purchase:

You will be committed to a much higher monthly payment. Example: As you pay interest on the whole value of the car, hire purchase is not a good choice if you only plan to keep the car for 2-3 years;Hire purchase is not a flexible option if you change your mind because there will be a sizeable termination fee. The VAT for the whole value of the car would normally be paid with the first installment.

When looking at hire purchase relative to a personal loan, the main disadvantage is that you are not the owner of the car from the outset.

External commercial borrowings: ECB is divided into two: Automatic route Approval route

Automatic Route: Eligible Borrowers Corporates, excluding financial Trusts and Non-profit making organisation not permitted NGOs engaged in micro finance Units in SEZ Recognised Lenders International Banks, Multilateral Financial Institutions, Export Credit Agencies, Suppliers of Equipment, Foreign Collaborators and Foreign Equity Holders Overseas Organisations complying with certain safeguards may provide ECB to NGOs engaged in Micro-Finance activities intermediaries,Individuals,

Amount & Maturity Maximum amount of ECB by a corporate is US$500 million or equivalent during a FY Upto US$20 mio with minimum avg maturity of three years Above US$20 mio with minimum avg maturity of five years Borrowers in Infrastructure sector maximum amount of ECB in a FY US$100 million for rupee-expenditure

 Borrowers in other sectors maximum amount of ECB in a FY US$50 million for rupee-expenditure NGOs engaged in micro-finance can raise ECB upto US$ 5 million during a FY AD to ensure that at the time of drawdown, the forex exposure is hedged

All-in-Cost Ceiling Includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Payment of withholding tax in Indian Rupees is excluded Three years and Upto Five years 300 basis points over 6month Libor for respective currency More than Five years 500 basis points Libor for respective currency Permitted End Use Investment in real-sector industrial sector including SME and infrastructure sector in India Overseas Direct Investment in JVs/WOS NGOs permitted to lend to SHGs or for micro-credit Prohibition Utilisation of ECB proceeds is not permitted for On-lending or investment in capital market Acquiring a company(or a part thereof) in India by a corporate, Real Estate Working Capital General corporate purpose Repayment of existing Rupee loans. Guarantees Gtee/SBLC/LOU/LOC relating to ECB not permitted. Security Choice of Security left to the borrower. Overseas Parking Proceeds to be parked outside India till actual requirement, in the following instruments Deposits/CDs or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys

Deposits with overseas branch of an Authorised Dealer in India Treasury bills and other monetary instruments of one year maturity Prepayment Prepayment upto US$500 million without RBI permission subject to compliance of min avg maturity period Refinancing May be refinanced with fresh ECB. Lower all-in-cost. Outstanding maturity of the original ECB to be maintained Borrower must obtain LOAN REGISTRATION NUMBER(LRN) from RBI before drawdown APPROVAL ROUTE: Eligible Borrowers Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, EXIM Bank Banks and financial institutions which had participated in the textile or steel sector restructuring package ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) to finance import of infrastructure equipment for leasing to infrastructure projects. Finance import of infrastructure equipment for leasing to infrastructure projects. Special Purpose Vehicles, Financially Solvent Multi-State Co-operative Societies engaged in manufacturing activity Amount & Maturity Additional US$ 250 million over and above US$ 500 million under automatic route during a FY Average maturity of more than 10 years Prepayment and call/ put options not permitted for such ECB upto a period of 10 years All-in-Cost Ceiling - Includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee and fees payable in Indian Rupees. Payment of withholding tax in Indian Rupees is excluded.

 Recognised Lenders International Banks, International Capital Markets, Multilateral Financial Institutions Export Credit Agencies Suppliers of equipment Foreign Collaborators Foreign Equity Holders- minimum equity held 25 %, debt-ratio exceeds 4:1 Permitted End Use Investment in real-sector industrial sector including SME and infrastructure sector in India Overseas Direct Investment in JVs/WOS Prohibited End Use On-lending or investment in capital market Acquiring a company(or a part thereof) in India by a corporate, Real Estate Working Capital General corporate purpose Repayment of existing Rupee loans. Guarantees Gtee/SBLC/LOU/LOC relating to ECB not normally permitted.Applications to be considered on merit subject to prudential norms. Prepayment Prepayment of ECB up to USD 500 million may be allowed by the AD bank without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan. Pre-payment of ECB for amounts exceeding USD 500 million would be considered by the Reserve Bank under the Approval Route.

Refinancing Lower all-in-cost Outstanding maturity of the original ECB is maintained Applicants are required to submit an application in form ECB through designated AD bank to the Chief General Manager,Foreign Exchange Department, RBI, Central Office, External Commercial Borrowings Division, Mumbai 400 001, along with necessary documents.

BONDS: Bonds: long-term debt securities issued by government agencies or corporations Par value: for a bond, its face value, or the amount returned to the investor at the maturity date when a bond is due Most bonds have maturities between 1030 years CHARECTERISTICS: Call feature: a feature on a bond that allows the issuer to repurchase the bond from the investor before maturity These bonds offer a slightly higher return Convertible bond: a bond that can be converted into a stated number of shares of the issuers stock if the stock price reaches a specified price These bonds tend to offer a slightly lower return A bonds yield to maturity: the annualized return on a bond if it is held to maturity If a bond sells at par value, its yield to maturity equals the coupon rate If a bond sells below par value, its yield to maturity would exceed the coupon rate If a bond sells above par value, its yield to maturity would be less than the coupon rate TYPES OF BONDS:

Treasury bonds: long-term debt securities issued by the U.S. Treasury Payments guaranteed by federal government Interest is subject to federal income tax, but exempt from state and local taxes Can easily be sold in the secondary market Municipal bonds: long-term debt securities issued by state and local government agencies Low risk Interest exempt from federal income tax Federal agency bonds: long-term debt securities issued by federal agencies Low default risk Interest is taxable Corporate bonds: long-term debt securities issued by large firms Subject to default risk High-yield (junk) bonds: bonds issued by smaller, less stable corporations that are subject to a higher degree of default risk