BONDS

Bonds: When you buy a bond you have loaned money to a company or government. In return that company promises to repay the amount borrowed plus interest.

Corporate bonds are issued by publicly owned companies. Often in denominations of $1,000 and usually paid semiannual interest. Municipal bonds are issues by state or local governments. Usually have 20 year maturity, paid semiannual interest and sold in denominations of $5,000 U.S. Securities are issued by the US government. A convertible bond is a bond that an investor can trade for shares of stock.

Types of U.S. Securities: Treasury bills have 1 year maturity and are zero coupon bonds. Treasury notes mature in 2-10 years and pay interest semiannually. Treasury bonds mature in 30 years and pay interest semiannually. Savings bond are purchased at half of face-value (maturity value).

Bond prices change with interest rates. When interest rates go up, prices of currently trading bonds tend to go down and vice versa. If a bond is held to maturity, the investor will receive an amount stated on the bond known as the face value. Maturity date: specified future data which bond can be sold back at maturity value. Maturity value: specified amount promised to be repaid

For example, if you buy 5 corporate bonds at $1000 each and the bonds mature in 20 years, even if the value of the bond changes over the period of time they are held, the bonds will be worth a total of $5,000 at the time of maturity. In addition, the borrower may promise to pay interest twice a year for 20 years. The declared interest of the bond is called the coupon rate. Zero Coupon bonds pay no periodic interest, instead is bought at a discount price.

Bond Quote: Bond: Abbreviated name, coupon rate, and year of maturity Cur Yld: Current Yield, ratio of coupon rate by close Vol: Number of bonds sold for the day. (Not in 100’s like stocks) Close: percent of face value for the last bond sold that day Net Chg: Difference between the last price paid today and the previous day (in percent of face value).

Bond Ratings: Companies such as Moody’s and Standard & Poor’s provide bond reports to evaluate the quality of bonds. AAA is the highest rating, which means it is the safest with low risk. D is the lowest rating, meaning it is a high risk bond where the company could go bankrupt leaving their bonds worthless. Often referred to as a junk bond.

You buy a 6% $1,000 corporate bond that matures in 20 years. Interest is paid semiannually. How much money will you receive and when?

What is the coupon rate? When does the bond mature? How many bonds were sold today? Assuming a $1,000 face value, what was the price for the last bond traded? How did the price change from the preceding day?

You buy four $5,000 U.S. Treasury notes at a price of 106:14. What is the total price?

Open your book to page 349 and do U-Try-It problems 1-6 You MUST show work or give a reason of how you found your answer.