Financial Planning Government Bonds Corporate Bonds Bonds

Government bonds are another investment option. This section discusses: In This Section... Government Bonds Securities Treasury Bills, Notes, and Bonds Bonds Issued by Federal Agencies Bonds Issued by State and Local Governments

 Sold in units of $1,000 to $10,000  May reach maturity in 13, 26, or 52 weeks  Are discounted securities—the purchase price you pay is less than the face value; on the maturity date you receive the full face value of the T-bill. Treasury Bills (or T-bills) Government Bonds and Securities

 Sold in units of $1,000  Maturity date can be from one to ten years  Have higher interest rates than T-bills Treasury Notes Government Bonds and Securities

 Issued in minimum units of $1,000  Matures in 10 to 30 years.  Interest rates are higher than those for T-bills or Treasury notes Treasury Bonds Government Bonds and Securities

 Purchase price is one-half of its face value  Can redeem a savings bond anytime from 6 months to 30 years from the date of purchase  When redeemed, you receive the amount that you paid plus interest. U.S. Savings Bonds (Series EE Bonds) Government Bonds and Securities

Q: What is the dollar value of all bonds issued by the U.S. government? A: over $5.5 trillion Q: How much interest does the U.S. government pay annually to service this debt? A: over $350 billion Did You Know? Government Bonds and Securities

Federal agencies that issue bonds include: Bonds Issued by Federal Agencies Government Bonds and Securities Federal National Mortgage Association (Fannie Mae) Federal Home Loan Mortgage (Freddie Mac) Government National Mortgage Association (Ginnie Mae) Student Loan Marketing Association (Sallie Mae)

Mortgage bond Mortgage bond (or secured bond)— a bond that is backed by assets of the corporation. Convertible bond Convertible bond— a bond that an investor can trade for shares of the corporation’s common stock. Types of Corporate Bonds Government Bonds and Securities

Municipal bond Municipal bond (or muni)— a security issued by a state or local (town, city, county) government to pay for its ongoing activities as well as major projects, such as airports, schools, and highways. Bonds Issued by State and Local Governments Government Bonds and Securities

General obligation bond General obligation bond— a bond that is backed by the full faith and credit of the government that issued it. Government Bonds and Securities Bonds Issued by State and Local Governments

Revenue bond Revenue bond— a bond that is repaid from the income generated by the project it is designed to finance. Government Bonds and Securities Bonds Issued by State and Local Governments

1) Why does the federal government issue bonds and other securities? 2) Why do state and local governments issue bonds? 3)Identify three reasons why an investor might purchase a government bond. Check Your Understanding Government Bonds and Securities

Corporate Bonds

The face of a corporate bond states: Characteristics of Corporate Bonds A Typical Corporate Bond Corporate Bonds Interest rate Maturity date Face value of the bond

Go Figure... A Bond’s Annual Interest Corporate Bonds

 To borrow money for major purchases  To raise money when it is difficult to sell stock  To finance regular business activities  To reduce the amount of tax a corporation must pay Why Corporations Sell Corporate Bonds Corporate Bonds

Debenture Debenture— a bond that is backed only by the reputation of the issuing corporation rather than by its specific assets. Mortgage bond Mortgage bond (or secured bond)— a bond that is backed by assets of the corporation. Types of Corporate Bonds Corporate Bonds

Convertible bond Convertible bond— a bond that an investor can trade for shares of the corporation’s common stock. Subordinated debenture Subordinated debenture— an unsecured bond that gives bondholders claim to interest payments and assets of the corporation only after all other bondholders have been paid. Types of Corporate Bonds Corporate Bonds

call feature  A call feature allows a corporation to buy back bonds from bondholders before the maturity dates. sinking fund  A sinking fund is a fund to which a corporation makes deposits for the purpose of paying back a bond issue. Methods Corporations Use to Repay Bonds Corporate Bonds

 Serial bonds  Serial bonds allow a corporation to repay bond issues over several years because these bonds are issued at the same time but mature on different dates. Methods Corporations Use to Repay Bonds Corporate Bonds

 They are safer than stocks in that creditors usually have first access to assets in case of bankruptcy  Some investors use corporate and government bonds to diversify their investment portfolios.  Most bonds provide interest income. Why Investors Buy Corporate Bonds Corporate Bonds

 Bonds may increase in value depending on the bond market.  The face value of the bond is repaid when it reaches maturity. Why Investors Buy Corporate Bonds Corporate Bonds

The method used by a company to pay you interest depends on the type of corporate bond you purchased. Interest Income Corporate Bonds Registered bond Registered bond—a bond registered in the owner’s name. Interest checks are mailed directly to the bondholder.

Interest Income Corporate Bonds Registered coupon bond Registered coupon bond—a bond registered in the owner’s name for the face value only. Interest is paid to the holder of the detachable coupons. Bearer bond Bearer bond—a bond that is not registered in the investor’s name. Interest is paid to holder of the coupons, and anyone who has possession of the bond can collect on them. These types of bonds are no longer issued, but some are still in circulation.

Interest Income Corporate Bonds Zero-coupon bond Zero-coupon bond—a bond that provides no interest payments. It is sold at price far below its face value and redeemed at maturity for face value.

Go Figure... A Bond’s Market Value Corporate Bonds

1) What are three important characteristics of corporate bonds? 2) Why might a company decide to issue corporate bonds? 3) Identify three reasons why investors buy corporate bonds. 4) What is the disadvantage of owing bonds in a market where interest rates are rising? Check Your Understanding Corporate Bonds

Think Critically Corporate Bonds What advantages do bonds offer investors that common stocks do not offer?