1. Personal Finance Bonds
Bill Klinger

2. Personal Finance Review Asset classes Markets Returns Risks
Stocks (equities)
Types
Bid/ask
Yield
Buying
Broker
Market / limit order
Indexes

3. Bonds (Fixed-income) Attributes Also known as fixed income
Par value – amount on the bond (principal)
Usually denominated in $1000
Interest rate to be paid (usually 2x a year)
Maturity date – when principal is paid back
Also known as fixed income
Interest payments do not change over the life of the bond
1. By selling bonds, a firm obtains long-term debt capital.
2. issued in various denominations (face values), usually between $1,000 and $25,000
3. Because bondholders are creditors, they have a claim on the firm’s assets that must be satisfied before any claims of the stockholders in the event of the firm’s dissolution.

4. Bonds Characteristics Yield Yield to maturity Callable Convertible
= annual interest / price
NOTE: the price is the current price, not the par value
Yield to maturity
= rate will get if hold to maturity, includes par value

5. Types of Bonds Government Bonds Federal Agencies Municipal Bonds
issued by U.S. Treasury (Treasuries)
Sovereign debt
Federal Agencies
GNMA
FHA, VA
Municipal Bonds
Interest is tax-free
Issued by state and local governments
Revenue bond is a bond whose proceeds are to be used to pay for a project that will produce revenue (e.g., a toll bridge)
General obligation bond is a bond whose proceeds are used to pay for a non-revenue producing project (e.g., a fire station)
Government bonds
a. bonds issued by the U.S. Treasury
b. are backed by the full faith and credit of the U.S. government
c. they are considered the least risky of all bonds.

6. Corporate Bonds
Secured Bond—bond backed by a pledge of a company’s specific assets. (Think collateral)
Debenture—bond backed by the reputation of the issuer. (Think IOU)
Secured bond
a. backed by a specific pledge of company assets
b. firms can issue secured bonds at lower interest rates than would be to paid for comparable unsecured bonds.
Unsecured bond
a. also called a debenture
b. is backed only by the financial reputation of the issuing corporation

7. Bond Returns Interest Par value (principal) If sell before maturity
Paid bi-annually
Contractually obligated to pay
Owe income tax
Par value (principal)
Paid at maturity
Usually $1000
If sell before maturity
Price has probably changed from $1000
Will have a capital gain or loss

8. Bond Value Present value of Uses all investors’ rate of return
Annuity
Principal
Uses all investors’ rate of return
Your required rate of return may differ

9. Bond Risk Default risk Interest rate risk
Company or government is unable to pay
Interest rate risk
Bond interest rate does not change from what is printed on the bond (fixed income)
If market interest rates change, it will affect how much people are willing to pay for the bond – the bond price
Rates go up -> price goes down and vice versa
Inflation risk – same story as interest rates

10. Moody’s and Standard & Poor’s Bond Ratings

11. Bonds
Junk bonds
AKA “high yield” bonds
Don’t be fooled

12. Other Bonds U.S. Savings Bonds Zero coupon bonds
Buy at a discount from par value
Continue to earn interest for a period after maturity
Zero coupon bonds
Corporate bonds
Pay no interest
Sold at a discount

13. Bond Strategies Interest rate strategy Passive strategy
Bet on expectation of interest rate changes
Passive strategy
Buy for long-term
Maturity matching strategy
Buy to match future expenses
College
Retirement living

14. In Class
In groups of two
Chapter 16 Financial Planning Exercises