1. Chapter 13

2. Learning Objectives (part 1 of 3) Describe the two major philosophies of investing and the investment implications of each Describe the features of a bond Distinguish between agency, corporate, and municipal bonds Describe how a bond call works and why it is bad for the investor Discuss the various bond ratings and rating agencies

3. Learning Objectives (part 2 of 3) Compute the price of a bond Compute the yield to maturity of a bond Discuss how accrued interest is processed on bond trades Explain the relationship between coupon yield, current yield, and yield to maturity, and indicate which one an investor should use and when

4. Learning Objectives (part 3 of 3) Describe what a duration statistic is Describe how zero-coupon bonds and convertible bonds work Explain how to get a quick reading on what the bond markets are doing Describe some of the strategies to use when investing in bonds

5. Philosophies of Investing (1 of 2) Inefficient Market Hypothesis A bright person can identify undervalued stocks One should spend tons of time doing personal research Assumes most other people are stupid or an anxious to lose their money

6. Philosophies of Investing (2 of 2) Efficient Market Hypothesis Stocks are fairly priced to reflect their risk and expected return Select stocks based on fit with the portfolio Assumes most other people are reasonably bright and are trying to make money

7. Features of a bond Par or maturity value Maturity Date Coupon Rate Trustee Indenture A loan to the issuer of the bond

8. Issuers of bonds Government Issued by the U.S. Treasury Agencies Issued by an agency of the U.S. Government Municipals Issued by any government entity other than the federal government

9. Corporate Bonds May be classified by collateral Debentures Mortgage bonds Collateral Trust bonds May be classified by special features Convertibles Zero coupon Baby bonds

11. Indemnity Policies Do not explicitly cover medical expenses Pay a fixed dollar rate per day under specified conditions Examples: a hospital indemnity policy pays a per diem while in hospital Specific disease policy

12. Managed Care Three types of plans Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) Point-of-Service Plans (POSs) Two types of HMOs Exclusive HMO (primary care physician) Individual practice HMO (IPA-HMO)

13. PPO vs. POS Plans PPO is a fee-for-service plan Patient limited to providers in the PPO’s network POS provides a primary care physician

14. Medicare Part of Social Security Benefits Six choices for participation Original Medicare Plan (OMP) OMP with a Supplemental Insurance Policy Medicare Managed Care Plan Private Fee-for-Service Plan Medicare Medical Savings Account Plan (MSA) Religious Fraternal Benefit Society Plan (RFB)

15. Original Medicare Plan Part A: Hospital Insurance Enrollment automatic if entitled to Social Security benefits Part B: Medical Insurance Individuals must enroll Premium is paid as a reduction in Social Security benefit Many gaps in Medicare coverage (even with both parts)

16. Covering Medicare’s Gaps Retirees should have one or more of the following policies: Medicare Managed Care Medicare Select Medicaid Medigap Retiree health benefits Long-term care insurance

17. Medicare Managed Care Plans HMOs for people entitled to Medicare, four different organizational structures Health Maintenance Organization (HMO) HMO's with Point of Service Option (POS) Provider sponsored Organization (PSO) Preferred Provider Organization (PPO)

18. Medicaid Jointly funded, Federal-State health insurance program for specified low- income and needy people Originally for people eligible for Aid to Families with Dependent Children (AFDC) Rules vary among states

19. Long-Term Care Insurance (1 of 2) Covers cost of living in a nursing home Key elements of a policy Elimination peroid Maximum lifetime benefit Cost-of-living adjustment (COLA) Cheaper when younger, but not everyone will need the benefits

20. Long-Term Care Insurance (2 of 2) Key features to look for in a policy Make sure daily benefit adequate to cover daily cost in a nursing home Annual inflation rider (COLA) Make sure benefits last at least 3 years Generous definition of qualification for nursing home admission Renewable for life & waiver of premiums

21. Disability Income Insurance At least as important as life insurance Key elements of a policy Replacement ratio (upper limit 50% to 70%) Elimination period (2 weeks to 6 months) Duration of benefits (2 years to age 65) Residual rider Guaranteed future insurability

22. Alternatives to disability income insurance Social Security disability income Available only to covered workers Six months elimination period Strict rules on definition of disability Worker’s Compensation Injury will not necessarily occur at work Even if it does, several exceptions to quality for coverage