By: Mike Funicello

Bond- an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate. Maturity- The final payment date of a loan or other financial instrument at which all interest and principal is due to be paid. Callability- Feature of a security that allows the issuer to redeem the security prior to maturity by calling it in, or forcing the holder to sell it back. Accrued interest- The interest that has accumulated since the principle investment, or since the previous interest payment if there has been one already.

 When redeeming a bond, there are 3 primary types of call features:  Optional Redemption- allows the issuer, at its option, to redeem the bonds. Many municipal bonds, for example, have optional call features that issuers may exercise after a period of years, often ten years.  Sinking Fund Redemption- requires the issuer to regularly set aside money for the redemption of the bonds before maturity.  Extraordinary Redemption- allows the issuer to call its bonds before maturity if certain specified events occur, such as the project for which the bond was issued to finance has been damaged or destroyed.

 A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate.  ‘IOU’ simply means I Owe You.  The 3 basic types of bonds are:  Gov’t (Treasury) Bonds  Municipal Bonds  Corporate Bonds

 A bond issued by the government.  Usually referred to as “risk-free bonds” because the government can raise taxes or print more money to redeem the bond at maturity.  Maturity generally years.  They have a coupon payment every 6 months.  Current interest rates:

AAccrued interest is calculated on specific days. TTreasury bonds issued today are not callable, so they will continue to accrue interest until the maturity date.

M UNICIPAL B ONDS A bond issued by a city or other local government, or their agencies. Interest income received by holders is often exempt from the federal income tax and from the income tax of the state in which they are issued. Payment period generally semi-annually. Maturity date ranges from a few weeks to 30 or more years. Accrued interest is calculated on a 30-day month/360-day year. They are callable.

Corporate Bonds  Debts issued by industrial, financial and service companies to finance capital investment and operating cash flow.  In terms of total face value of bonds outstanding, the corporate bond market is bigger than each of the markets for municipal bonds, U.S. treasury securities, and government agencies securities.  Maturity date generally more than one year and about up to 30 years.  Is taxed more than the other 2 types of bonds.  Payment period generally twice a year.

Corporate Bonds (Cont.) LLike municipal bonds, the accrued interest is calculated on a 30-day month/360-day year. CCallable and non-callable

Question #1 What is a bond? A) An ‘IOU’ B) A debt to the company selling them C) A loan to an investor D) All of the above

Question #2 What are the 3 basic types of bonds? I.Gov’t (Treasury) bonds II.Municipal bonds III.Corporate bonds

Question #3 In terms of total face value of bonds outstanding, which market is the largest? A) Municipal bond market B) Gov’t agencies securities C) Corporate bond market D) U.S. treasury securities