1. BONDS
Savings and Investing

2. Characteristics of Bonds
Bonds are debt instruments offered by the federal, state or local government and corporations
Bonds are loans that are repaid at maturity
Most bonds mature in 10 years
Face value is the amount the bondholder will be repaid at maturity
AKA par value because that is the value printed on the certificate

3. Difference Between Stocks and Bonds
The bond purchaser is loaning the company or government money
If the bond issuer goes bankrupt, the bond holder is a creditor and will be repaid during liquidation
A stock holder has no claim on the company assets and can lose their entire investment

4. Corporate Bonds Sold by corporations on the open market, like stocks
Fixed income instruments – pay a specified amount of interest at regular intervals
Usually twice per year
Contract rate = interest rate (APR)
Usually have a face value of at least $1,000
$5,000 is a common denomination

5. Corporate Bonds (cont’d)
Coupon bonds (bearer bonds) require owner to clip the interest coupon and present it to a bank for payment.
Registered bond – interest payments are mailed semiannually to registered owner
Callable bond – issuer has the right to pay off (call back) prior to maturity date
Corporations can take advantage of drop in interest rates
Corporation usually pays a small premium when a bond is called

6. Types of Corporate Bonds
Debenture – backed only by the general credit standing of the corporation
Mortgage bond (secured bond) – specific assets serve as collateral to assure repayment of the debt
Convertible bond – can be exchanged for a specific number of shares of common stock at a specific price (or higher)

7. Earnings on Corporate Bonds
Since APR is fixed and there is no compounding return on bonds (yield) should equal APR
Market price of bonds fluctuate, which effects yield
If price is higher than purchase price, the bond is selling at a premium
If price is lower than purchase price, the bond is selling at a discount

8. Yield Yield = Annual interest dollar amount/Market Price
Yield < APR when bond is at a premium
Yield > APR when bond is at a discount
Price of a 6% $10,000 bond
Yield Calculation
Yield
Face value
$600/$10,000 6%
Premium (104)
$600/$10,400
5.8%
Discount (96)
$600/$9,600
6.3%

9. Municipal Bonds Munis have a minimum investment of $5,000
Revenue bond is issued to raise money for a specific public works project (airports, hospitals)
Revenue from the project is used to pay the interest and repay the principal
General obligation bond – backed by the power of the issuer to levy taxes
Munis carry a lower interest rate than corporate bonds, but are exempt from federal and some state taxes

10. Other Types of Bonds Savings bonds and Treasury Bonds
Low yield, tax free investment
Considered risk free
Agency bonds – debt securities issued by other Federal agencies
Slightly higher yield than treasury securities
Zero coupon bonds – sold at a deep discount, no interest payments, redeemable for face value at maturity (can be Corporate or Municipal)

11. Buying and Selling Bonds
Full service and discount brokers
Savings bonds and Treasury securities can be purchased through the Federal Reserve System or online through Treasury Direct
Can purchase at a bank, but will pay a commission
Payroll deduction option, but it is slow

12. Evaluating Bonds Considered a safe investment
Fixed payment, debt obligation
Earn return on bonds by earning interest, redeeming at face value, and through appreciation
Bond prices are impacted by interest rates
As interest rate rise, the value of bonds decrease
Bond prices are listed in financial tables of newspapers and online

13. Bond Ratings Rating agencies include Moody’s and Standard & Poor’s
Ratings reflect the relative risk level of the bond
Highest rating is AAA or Triple A
Lowest rating is D, which indicates default
Investment-grade bonds have a minimun rating of Baa in Moody’s or BBB in S&P
Junk bonds are highly risky
Ba/BB or lower