Presentation on theme: "Bell work. What is a Bond? Bond is like an IOU for a loan you’ve made to an institution From a government or a corporation. given for a certain."— Presentation transcript:
Bond is like an IOU for a loan you’ve made to an institution From a government or a corporation. given for a certain period of time at a certain rate of interest Is a fixed-income investments often included in a diverse investment portfolio variety of bonds available
Purchasing a Bond you are lending money to the issuer, corporation, the government government agency. issuer pays the interest on a predetermined schedule (usually quarterly) for the life of the bond the period of time the issuer has to repay the investor the issuer promises to pay you ( the bond investor) a specific rate of interest known as the “coupon rate”. face value or principal ($1000) when the bond matures
“Investment Grade Bonds” Bonds that are sold by a very reliable issuer, the government, a large corporation, or a government agency is considered the highest rated type of bond by Moody’s, Standard & Poor’s, and Fitch. (the main investment rating services in the United States). is considered to have the least chance of missing interest payments or failing to pay back the principal (face or par) value.
Corporate bonds Bonds are major sources of corporate borrowing. Debentures, the most common type of corporate bond, are backed by the general credit of the corporation, Asset-backed bonds are backed by specific corporate assets, such as property or equipment
Municipal bonds issued by state and local governments. General obligation bonds are backed by the full faith and credit of the issuer, Revenue bonds by the income generated by the particular project being financed.
Agency bonds Some government sponsored but privately owned corporations (like Fannie Mae and Freddie Mac), and certain federal government agencies (like Ginnie Mae and Tennessee Valley Authority) issue bonds to raise funds either to make loan money available or to pay off new projects.
U.S. Treasury bonds backed by the full faith and credit of the United State government. When the government spends more than it collects in taxes and other revenues, it issues Treasury notes, bills, and bonds to borrow the money to pay the difference. Treasury bonds have the longest term or period of time before the loan must be repaid (10 years or more). Treasury bills have the shortest (less than two years
Research Bond Investments Number of key variables bond’s maturity, redemption features, credit quality, interest (or coupon) rate, price, Yield tax status help determine the value of the bond and how well it meets your investment needs
Vocabulary Default: Failure to pay principal or interest when due. Fixed-Income Investments: Pay interest on a set schedule
Vocabulary High-Yield Bonds: attract investors the issuers of these bonds pay a higher rate of interest than investment grade bonds with the same maturity. “Junk Bonds “ rated below investment grade Issuer: An entity which issues and is obligated to pay principal and interest on a debt security.
Vocabulary Interest rate: Compensation paid or to be paid for the use of money. IOU: Means exactly as it sounds, “I Owe You.” It is an acknowledgement of a debt
Vocabulary Maturity: The date when the principal amount of a security is payable Par value: The principal amount of a bond or note due at maturity. (face value) Principal
Vocabulary Prepayment: The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due. Trade date: The date when the purchase or sale of a bond is transacted
Activities Activity Sheet 1: About Bonds Activity Sheet 2: Choosing Bonds Activity Sheet 3: An Interest in Bonds
Ticket Out Visit the Foundation for Investor Education’s Path to Investing site (www.pathtoinvesting.org) or Investing in Bonds (www.Investinginbonds.com) to look up the definition of the following terms: Laddering Barbell Bond Swap