2. Thursday, March 23, 2017
Objective: Students will be able to assess ways to be a wise investor when purchasing bonds. Purpose: Knowing how to make smart investments can save you a lot of money.

3. What are Bonds? Bonds: certificates sold by a company or government
They go to finance projects or expansion of the business
Bonds are basically loans or IOUs that represent debt that the government or a corporation must repay to an investor
Bonds usually have a fixed interest rate for a fixed period of time
Bonds are generally low-risk investments and usually pay off

4. Components of Bonds
Coupon Rate: the interest rate that the bond issuer will pay to the bondholder
Maturity: the time at which payment to a bondholder is due
Some bonds have a maturity of 10, 20 or 30 years.
Par Value: the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity

5. Investors can earn money by buying bonds at a discount, called discount from par. How do interest rates affect bond prices?

6. Characteristics of Bonds
Advantages
Once the bond is sold, the coupon rate for that bond will not go up or down.
Unlike stockholders, bondholders do not own part of the company. Companies do not have to share their profits with bondholders.
Disadvantages for the issuer
The company must make fixed interest payments, even in bad years when it does not make money.
If the firm does not maintain financial health, its bonds may be downgraded to a lower bond rating.

7. By issuing a bond, a company can make investments to help it grow
By issuing a bond, a company can make investments to help it grow. What might happen if a company doesn’t set aside money to redeem the bond at maturity?

8. Types of Bonds
Savings Bonds: a low-denomination bond issued by the United States government
Have a fixed rate of interest for 30 years
The government uses funds from the sale of savings bonds to help pay for public works projects
A problem with savings bonds is inflation
If a Treasury bond pays you 5 percent interest per year, but the inflation rate is 3 percent, you are really getting just 2 percent interest on the bond

9. Treasury bonds, notes, and bills represent debt that the government must repay the investor. Which of these three types of government securities is the easiest to turn into cash?

10. Other Bonds
Corporate Bond: a bond issued by a corporation to help raise money for expansion
generally issued in denominations of $1,000 or $5,000
have moderate levels of risk
Municipal Bond: a bond issued by a state or local government or a municipality to finance a public project

11. Governments sell bonds to finance projects, and investors buy them because they expect to earn interest. Both parties usually benefit from the transaction.

12. Since 2000, yields for corporate and treasury bonds have dropped significantly. Which of these two types of bonds would you expect to carry less risk? Why?

13. Investments with lower risk usually have lower reward as well
Investments with lower risk usually have lower reward as well. Bonds issued by the government are generally less risky than bonds issues by corporations.

14. Bond Ratings

15. Bond Ratings
An investment-grade bond is considered safe enough for banks to invest in
The lowest grade generally means that the bond is in default—that is, the issuer has not kept up with interest payments or has defaulted on paying principal
The lower a bond’s rating is, the harder it will be to sell
The higher the bond rating, the lower the interest rate the company usually has to pay to get people to buy its bonds