1.22 Explain the nature of Bonds

Bonds A bond is a loan an investor makes to a corporation, government, federal agency or other organization in exchange for interest payments over a specified term plus repayment of principal at the bond’s maturity date. There are a wide variety including Treasuries, agency bonds, corporate bonds, municipal bonds and more A bond represents owning debt of in a company.  For example if you own 1 bond from McDonalds, then McDonalds owes you money.  Companies issue bonds to help finance their business operations or investments.

Bonds versus Stocks Unlike stock shareholders who own a portion of the company and may have voting rights, bondholders don’t have ownership or voting rights; but they do have a greater financial claim should the issuer go bankrupt. For that reason, and because their values tend to fluctuate less, bonds are usually considered a safer investment than stocks. Typically, when stock values decline in a poor economy, bonds become a more attractive investment; conversely, when stocks do well, bonds tend to decline in value.

Explain why the Government and corporations issue bonds When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. When the loan reaches its maturity date, the investor’s loan is repaid. The decision to issue bonds instead of selecting other methods of raising money can be driven by many factors. Comparing the features and benefits of bonds versus other common methods of raising cash provides some insight into why companies often look to bond issuance when they need to raise cash to fund corporate activities.

Types of Bonds Bonds are issued by many different entities, from the U.S. government to cities and corporations, as well as international bodies. Some bonds, such as mortgage-backed securities, can be issued by financial institutions. Thousands of bonds are issued each year, and even though bonds may share the same issuer, it’s a pretty good bet that each bond is unique

U.S. Treasury Securities U.S. Treasury securities ("Treasuries") are issued by the federal government and are considered to be among the safest investments you can make, because all Treasury securities are backed by the "full faith and credit" of the U.S. government. This means that come what may—recession, inflation, war—the U.S. government is going to take care of its bondholders There are other features of Treasuries that are appealing to the individual investor. They can be bought in denominations of $100, making them affordable, and the buying process is quite convenient. You can either buy Treasuries through brokerage firms and banks, or you can simply follow the instructions on the

U.S Treasury Securities Cont.

U.S. Savings Bonds Savings bonds are issued by the federal government and backed by the "full faith and credit" guarantee. But unlike Treasuries, savings bonds may be purchased for an investment as low as $25. Like Treasuries, the interest earned on your savings bonds is subject to federal income tax, but not state or local income taxes. Savings bonds can be purchased from the U.S. Department of the Treasury, at banks and credit unions, and are often offered by employers through payroll deduction. But unlike most other Treasuries, savings bonds cannot be bought and sold in the secondary market. In fact, only the person or persons who have registered a savings bond can receive payment for it

Mortgage-Backed Securities Mortgage-backed securities, called MBS, are bonds secured by home and other real estate loans. They are created when a number of these loans, usually with similar characteristics, are pooled together. For instance, a bank offering home mortgages might round up $10 million worth of such mortgages. That pool is then sold to a federal government agency like Ginnie Mae or a government sponsored- enterprise (GSE) such as Fannie Mae or Freddie Mac, or to a securities firm to be used as the collateral for the new MBS.

Corporate Bonds Corporate Bonds Companies issue corporate bonds (or corporates) to raise money for capital expenditures, operations and acquisitions. Corporates are issued by all types of businesses, and are segmented into major industry groups.

Performance Activity Many people believe they can't lose money in bonds. Wrong! Although the interest payments you'll get from owning a bond are "fixed," your return is anything but. Create a PowerPoint Presentation explaining how the risk below can impact you bond’s return Interest rate risk Liquidity risk Company and industry “event” risk Inflation risk Market risk Call risk Buying with a broker Credit risk Economic risk

Performance Activity Where is the Best Place to Invest $100,000. Research company Bonds and discuss the 5 companies you would invest in. List the reasons and discuss the reasons why.