1. BONDS
Both governments and corporations can raise money for investment(financing projects/expansion) by issuing (selling) bonds → for example, during WWII the U.S. government sold war bonds to help pay for the war effort

2. BONDS AS FINANCIAL ASSETS
Bonds are basically loans (IOUs) that represent debt that the government or corporation who issued the bond must pay to the investor who bought it → Bonds pay a fixed-rate of interest at regular intervals for the life of the bond (like cds, bonds have terms) and are generally (but not always!) low-risk investments

3. BONDS AS FINANCIAL ASSETS
Bonds have three components: → the coupon rate is the interest rate to be paid to the bondholder → the maturity is the time at which payment to the bondholder is due → the par value (aka face value or principal) is the amount the investor pays for the bond

4. BONDS AS FINANCIAL ASSETS
If you bought a bond with a 5% coupon rate and a 10-year maturity that cost $1,000, you expect the following: 1. You would receive $50 per year (5% of $1,000) for 10 years for a total of $ At the end of ten years you will receive back your $1, Thus, you will have the par value returned and you will have earned $500

5. BONDS AS FINANCIAL ASSETS
Most bonds can be sold before they reach maturity (they will always keep the same interest rate, no matter the holder) → if you bought your $1,000 bond at a 5% coupon rate six years ago, but now interest rates are 6%, you will have to sell it at a discount (why would somebody pay the same price for a 5% bond as a 6% bond)

6. BOND RATINGS
Bonds are given ratings based on their risk by companies such as Standard & Poor’s and Moody’s, which help investors decide which ones they want to buy → the highest-rated bonds are AAA/Aaa, which means these are safe, while the lowest- rated bonds are D, which means that the bond is in default (the issuer is not keeping up with payments)

7. BOND RATINGS
→ the higher the bond rating, the safer the bond, the lower the interest rate the corporation/government has to pay people to buy its bonds

8. BOND DIS- AND AD-VANTAGES TO THE ISSUER
Advantages 1. Bond interest rates are fixed so the issuer knows how much it will have to pay in the future 2. Bonds represent debt, not ownership, so the issuer does not have to share control or profit with the bond holder Disadvantages 1. The company must always make its payments, whether they are doing well or not 2. Potential for poor financial health to cause bonds to be downgraded

9. TYPES OF BONDS – SAVINGS BONDS
Savings bonds are issued by the federal government to help pay for public works projects (buildings, roads, etc.) → often given as gifts to young people, they are virtually risk-free due to government’s ability to tax/raise money → paper bonds are no longer sold (previously sold at ½ face value); now sold at face value electronically, earning fixed-interest for 30 years

10. TYPES OF BONDS – TREASURY BONDS, BILLS, AND NOTES
T-bills, T-notes, and Treasury bonds are issued by the U.S. Treasury Dept. and like savings bonds, they are very low-risk (backed by the “full faith and credit” of the U.S. gov’t → Each type of treasury differs in maturity (and thus interest rate): T-bills are for 3, 6, or 12 months, T-notes are from 2-10 years, and Treasury bonds are from years

11. TYPES OF BONDS – MUNICIPAL BONDS
Municipal bonds (‘munis’) are issued by state and local governments and municipalities to finance projects such as schools, highways, parks, libraries, etc. → munis are generally safe investments (state/local gov’ts can tax) and are popular because 1) they often have tangible local benefits, and 2) the interest on them is not taxed at federal or state level

12. TYPES OF BONDS – CORPORATE BONDS
Corporate bonds are issued by businesses to raise money for growth and expansion → interest on corporate bonds is taxed as ordinary income, but because corporations cannot tax to raise money they have a moderate level of risk and thus may pay higher rates of interest

13. TYPES OF BONDS – JUNK BONDS
Junk bonds are low-rated, high-risk bonds issued by governments or corporations that have either defaulted in the past or are at risk of doing so → investors in junk bonds face a high chance of losing their money, but also the possibility of a high return from high interest rates