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Basic Investing- Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined.

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Presentation on theme: "Basic Investing- Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined."— Presentation transcript:

1 Basic Investing- Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.. The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". Par value of bond is which is = $1,000. The bond pays par value at maturity.

2 Basic Investing- Bonds The United States government issues several different kinds of bonds through the Bureau of the Public Debt, an agency U.S. Department of the Treasury. Treasury debt securities are classified according to their maturities: Treasury Bills have maturities of one year or less. Treasury Notes have maturities of two to ten years. Treasury Bonds have maturities greater than ten years. Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security. Investors often shorten the word Treasury to just the letter "T" when referring to these bonds. Thus, Treasury Bonds are known as T-Bonds, Treasury Notes are called T-Notes, and Treasury Bills are T-Bills. Treasury Bills are issued in three maturities. Bills with 91-day and 182-day maturities are auctioned by the Treasury each Monday. 364-day Bills are auctioned every four weeks.

3 Basic Investing - Bonds Treasury Bills are issued in three maturities. Bills with 91-day and 182-day maturities are auctioned by the Treasury each Monday. 364-day Bills are auctioned every four weeks on Thursday, 13 times a year. The interest rate of T-Bills is determined at each auction, depending on what bidders are willing to pay. T-Bills do not make interest payments, however. Instead, they are purchased at a discount to face value. They are the only Treasury securities that sell at a discount. U.S. Treasury Notes are issued in two-, three-, five-, and ten-year maturities. The two year and five year Notes are auctioned each month, while the three year Notes are issued quarterly, and ten year Notes are auctioned six times a year. All Notes pay interest twice a year, and expire at par value. They offer state tax exemption.

4 Basic Investing - Bonds Municipal bonds ("munis") are what help local or state governments to pay for public projects, such as the construction or improvement of schools, schools, streets, highways, hospitals, bridges, low-income housing, water and sewer systems, ports, airports and other public works. There are many different types of municipal bonds, including general obligation bonds, limited and special tax bonds, industrial revenue bonds, revenue bonds, housing bonds, moral obligation bonds The differences between all these kinds of munis comes down to how the issuer expects to eventually repay the bonds and make the interest payments. For instance, in the case of general obligation notes, the bond is simply backed by the "the full faith and credit" of the issuer. That means the local or state government that has issued the bond can use just about any means available to guarantee payments, including raising taxes. There is a federal tax exemption. Revenue bonds are paid back from revenue generated from the project. Ex. The NYS Thruway

5 Basic Investing - Bonds A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt. Most corporate bonds are taxable with terms of more than one year. There is no tax exemption for federal or state.

6 Basic Investing - Bonds Bond Ratings: AAA AA A BBB ___________________________ BB B CCC CC C D Investment Grade Junk


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