Section 2 – Bonds and Other Financial Assets Chapter 11

Objectives Describe the characteristics of bonds as financial assets. Identify different types of bonds. Describe the characteristics of other types of financial assets. Explain four different types of financial asset markets.

Bonds Bonds are certificates sold by a company or government to finance projects or expansion WWII War Bonds Fancy IOU’s Represent debt that gov’t/corporation must repay to investor

Three Components Coupon Rate Maturity Par Value Interest rate Maturity When payment is due (10, 20, 30 yrs) Par Value Face value or Principal Buyer=“Holder”, Seller=“Issuer”

Bonds Yield (Example Page 278) Discount from Par Annual rate of return Not all bonds are held to maturity Can be bought or sold, price change Discount from Par Ex. Page 278

Bond Ratings Two Firms That Publish Bond Ratings Good Higher Rating could make the bond sell at a higher price and lower interest rate

Issuer’s Point of View Advantage of selling bonds Disadvantages Coupon rate will not go up or down Bondholders do not own part of company like stocks Disadvantages Even in bad years company must make payments Firm’s bonds may receive low rating and be harder to sell

Types of Bonds Savings Bond Treasury Bonds, Bills and Notes $50-$10,000 Virtually no risk Gov’t, uses for public works projects Purchase a $50 Savings Bond for $25, when it matures get $25 you paid plus $25 interest Treasury Bonds, Bills and Notes U.S. Treasury Department T-Bills, T-Notes Backed by “full faith and credit” of U.S. Gov’t Diff. Term lengths

Types of Bonds Municipal Bonds Corporate Bonds Junk Bonds “Muni’s” State and Local Gov’ts use for public improvements Safe Corporate Bonds Moderate risk Rely on company’s success Junk Bonds Low Rating, High Risk, Potential for High Yield International Bonds Foreign Countries issue bonds

Securities and Exchange Commission An independent government agency that regulates financial markets and investment Companies. It enforces laws prohibiting fraud and dishonest investment practices.

Other Financial Assets Certificate of Deposit Money Market Mutual Funds Not Covered by FDIC insurance, so risky Stock

Financial Asset Markets Capital Markets Greater than 1 yr Long-term CD’s, Corporate and Gov’t Bonds Money Markets Less than 1 yr Short-term CD’s, T-bills, Money Market Mutual Funds

Financial Asset Markets Primary Non-transferable Savings Bonds Secondary Can be resold without penalty