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What is a Bond?

Bond  is like an IOU for a loan you’ve made to an institution  From a government or a corporation.  given for a certain period of time at a certain rate of interest  Is a fixed-income investments  often included in a diverse investment portfolio  variety of bonds available

Purchasing a Bond  you are lending money to the issuer,  corporation,  the government  government agency.  issuer pays the interest on a predetermined schedule (usually quarterly) for the life of the bond  the period of time the issuer has to repay the investor  the issuer promises to pay you ( the bond investor)  a specific rate of interest known as the “coupon rate”.  face value or principal ($1000) when the bond matures

“Investment Grade Bonds”  Bonds that are sold by a very reliable issuer,  the government,  a large corporation,  or a government agency  is considered the highest rated type of bond  by Moody’s, Standard & Poor’s, and Fitch. (the main investment rating services in the United States).  is considered to have the least chance of missing interest payments or failing to pay back the principal (face or par) value.

Corporate bonds  Bonds are major sources of corporate borrowing.  Debentures,  the most common type of corporate bond,  are backed by the general credit of the corporation,  Asset-backed bonds  are backed by specific corporate assets,  such as property or equipment

Municipal bonds  issued by state and local governments.  General obligation bonds  are backed by the full faith and credit of the issuer,  Revenue bonds  by the income generated by the particular project being financed.

Agency bonds  Some government sponsored but privately owned corporations  (like Fannie Mae and Freddie Mac),  and certain federal government agencies (like Ginnie Mae and Tennessee Valley Authority)  issue bonds to raise funds either to make loan money available or to pay off new projects.

U.S. Treasury bonds  backed by the full faith and credit of the United State government.  When the government spends more than it collects in taxes and other revenues,  it issues Treasury notes, bills, and bonds to borrow the money to pay the difference.  Treasury bonds have the longest term or period of time before the loan must be repaid (10 years or more).  Treasury bills have the shortest (less than two years

Research Bond Investments  Number of key variables  bond’s maturity,  redemption features,  credit quality,  interest (or coupon) rate,  price,  Yield  tax status  help determine the value of the bond and how well it meets your investment needs

Vocabulary  Default: Failure to pay principal or interest when due.  Fixed-Income Investments: Pay interest on a set schedule

Vocabulary  High-Yield Bonds:  attract investors  the issuers of these bonds pay a higher rate of interest than investment grade bonds with the same maturity.  “Junk Bonds “ rated below investment grade  Issuer: An entity which issues and is obligated to pay principal and interest on a debt security.

Vocabulary  Interest rate: Compensation paid or to be paid for the use of money.  IOU: Means exactly as it sounds, “I Owe You.” It is an acknowledgement of a debt

Vocabulary  Maturity: The date when the principal amount of a security is payable  Par value: The principal amount of a bond or note due at maturity.  (face value)  Principal

Vocabulary  Prepayment: The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due.  Trade date: The date when the purchase or sale of a bond is transacted

Activities  Activity Sheet 1: About Bonds  Activity Sheet 2: Choosing Bonds  Activity Sheet 3: An Interest in Bonds

Ticket Out  Visit the Foundation for Investor Education’s Path to Investing site ( or Investing in Bonds ( to look up the definition of the following terms:  Laddering  Barbell  Bond Swap