Bonds and Mutual Funds Carl Johnson Financial Literacy Jenks High School

Corporate Bonds When you buy a corporate bond, you are basically loaning money to a corporation ▫It is a corporation’s written pledge to repay the bondholder a specified amount of money with interest The bond’s interest rate, maturity date and face value are stated on the bond Maturity dates can range from 1 to 30 years and can be listed as short term, intermediate term and long term

Why Corporations Sell Bonds Corporations sell bonds… ▫when it is difficult or impossible to sell stock ▫to finance regular business activities ▫to reduce the amount of tax that a corporation must pay because interest paid to bondholders is tax deductible

Market Value of a Bond The market value of a bond may fluctuate before its maturity date ▫These result from changes in overall interest rates in the economy Selling a bond at less than face value is called selling at a discount Selling a bond at more than face value is called selling at a premium

Government Bonds and Securities The federal government sells bonds and other securities to finance the nation debt, and are considered to be risk free The Treasury Department offers three basic types of securities ▫Treasury Bills (T-bills) – Discounted securities which are sold in units of $1,000 and have several options on maturity dates ▫Treasury Notes – Have slightly higher interest rates than T- bills ▫Treasury Bonds – can only be purchased in secondary markets, with the most common having 30 year maturity dates ▫Series EE Savings Bonds ▫Series I Savings Bonds

Bonds Issued by State and Local Governments Municipal bonds are securities issued by a state or local government to pay for ongoing activities Can be either general obligation or revenue bonds ▫General obligation – backed by full faith and credit ▫Revenue – repaid by income of government that issued bond  Ex. Sports Arena – repaid by profits

Bond Ratings Ratings are used by investors to analyze the quality and risk associated with bonds Ratings range from AAA to D and can be broken down into four categories ▫High grade ▫Medium grade ▫Speculative ▫Default

Yield of a Bond Investment Yield is the rate of return earned by an investor that is usually stated in a percentage It is calculated by dividing the dollar amount of annual interest income by it’s current market value ▫See example on page 323 of your textbook

Mutual Funds Mutual funds are an investment alternative in which investors pool their money to buy stocks, bonds and other securities Can be used for retirement accounts such as 401K’s, 403B’s and IRA’s Key reasons for investing in mutual funds ▫Professional management ▫Diversification

Types of Mutual Funds Two types ▫Closed End – a mutual fund with a fixed number of shares that are issued by an investment company when the fund is first organized ▫Open End – a mutual fund with an unlimited number of shares that are issued and redeemed by an investment company at the investor’s request Funds can also be classified as load funds (commission) or no load funds (no commission) Investment companies also usually charge somewhere in the range of 0.5 to 1.25 in management fees of the fund’s assets

Categories of Mutual Funds 3 main types ▫Stock Mutual Funds (See pages for specifics) ▫Bond Mutual Funds (See pages for specifics) ▫Mixed Mutual Funds (See pages for specifics)

Taxes and Mutual Funds At then end of each year, investment firms send shareholders detailed statements regarding income gains during the past year It is the investor’s responsibility to maintain accurate records for taxation purposes General taxing guidelines ▫Report income dividends as regular income (taxable) ▫Report all capital gain distributions ▫Report all capital gains or losses

Buying Mutual Funds There are 5 options for purchasing mutual funds ▫Regular account transactions ▫Voluntary savings plans ▫Payroll deductions ▫Contractual savings plans ▫Reinvestment plans

Selling Mutual Funds You can sell closed end funds anytime on the stock exchange or OTC’s Open end funds can be sold to the investment company that sponsors the fund 4 additional ways of withdrawing your money ▫Investment Period withdrawal ▫Investment Period liquidation ▫Asset Growth Withdrawal ▫Dividend and Distribution Withdrawal