1. Section 2 – Bonds and Other Financial Assets
Chapter 11

2. Objectives Describe the characteristics of bonds as financial assets.
Identify different types of bonds.
Describe the characteristics of other types of financial assets.
Explain four different types of financial asset markets.

3. Bonds
Bonds are certificates sold by a company or government to finance projects or expansion
WWII
War Bonds
Fancy IOU’s
Represent debt that gov’t/corporation must repay to investor

4. Three Components Coupon Rate Maturity Par Value
Interest rate
Maturity
When payment is due (10, 20, 30 yrs)
Par Value
Face value or Principal
Buyer=“Holder”, Seller=“Issuer”

5. Bonds Yield (Example Page 278) Discount from Par Annual rate of return
Not all bonds are held to maturity
Can be bought or sold, price change
Discount from Par
Ex. Page 278

6. Bond Ratings Two Firms That Publish Bond Ratings Good
Higher Rating could make the bond sell at a higher price and lower interest rate

7. Issuer’s Point of View Advantage of selling bonds Disadvantages
Coupon rate will not go up or down
Bondholders do not own part of company like stocks
Disadvantages
Even in bad years company must make payments
Firm’s bonds may receive low rating and be harder to sell

8. Types of Bonds Savings Bond Treasury Bonds, Bills and Notes
$50-$10,000
Virtually no risk
Gov’t, uses for public works projects
Purchase a $50 Savings Bond for $25, when it matures get $25 you paid plus $25 interest
Treasury Bonds, Bills and Notes
U.S. Treasury Department
T-Bills, T-Notes
Backed by “full faith and credit” of U.S. Gov’t
Diff. Term lengths

9. Types of Bonds Municipal Bonds Corporate Bonds Junk Bonds
“Muni’s”
State and Local Gov’ts use for public improvements
Safe
Corporate Bonds
Moderate risk
Rely on company’s success
Junk Bonds
Low Rating, High Risk, Potential for High Yield
International Bonds
Foreign Countries issue bonds

11. Securities and Exchange Commission
An independent government agency that
regulates financial markets and investment
Companies. It enforces laws prohibiting fraud and
dishonest investment practices.

12. Other Financial Assets
Certificate of Deposit
Money Market Mutual Funds
Not Covered by FDIC insurance, so risky
Stock

13. Financial Asset Markets
Capital Markets
Greater than 1 yr
Long-term CD’s, Corporate and Gov’t Bonds
Money Markets
Less than 1 yr
Short-term CD’s, T-bills, Money Market Mutual Funds

14. Financial Asset Markets
Primary
Non-transferable
Savings Bonds
Secondary
Can be resold without penalty