BONDS 101 PUBLIC FUNDS INVESTING Prepared for: Presented by: Paul Jarvis Managing Director Member SIPC and FINRA. 11

2 2 Source: Bloomberg

33

BOND BASICS - WHAT IS A BOND? $100 1 Year 10.00% = % 44

BOND BASICS - WHAT IS A BOND? Bond Buyer (Lender) Bond Issuer (Borrower) $100 1 Year 10.00% =110 (Fixed)10% 55

BOND BASICS - MARKET RATES WENT DOWN TO 8% Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% =110 (Fixed)8% 66

BOND BASICS - SO, THE PRICE OF THIS BOND WENT UP... Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% =110 (Fixed)8% Interest rates for similar bonds went down to 8%. Therefore: Sell the bond at this price: $102 1 Year 8.00% (approx $8) = 110 (fixed) 77

BOND BASICS - MARKET RATES WENT UP TO 12% Interest rates for similar bonds went up to 12%. Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% =110 (Fixed)12% 88

BOND BASICS - SO, THE PRICE OF THIS BOND WENT DOWN... Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% =110 (Fixed)12% Interest rates for similar bonds went up to 12%. Therefore: Sell the bond at this price: $98 1 Year 12.00% (approx $12) = 110 (fixed) 99

BOND BASICS - WHEN RATES GO DOWN, PRICES NECESSARILY GO UP Bond Maturity Value $110 10

BOND BASICS The difference between 1.00% and 1.01% = 1 Basis Point The $ value of 1 Basis Point on $1 million Invested for 1 year = $100 In other words: 1 BP/$1MM/1 Year = $100 1 BP/1MM/6 Months = $50 11

BOND BASICS - A TYPICAL BOND Don’t forget about interest on interest…. 04/15/13CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/1304/15/15 $5,00004/15/14 $5,00010/15/14 $5,00004/15/151.00%$1,000,000 12

BOND BASICS - THIS BOND IS AT A DISCOUNT 04/15/13CouponInterestPaymentsYieldMaturity $990,012.50%$2,50010/15/1304/15/15 $2,50004/15/14 $2,50010/15/14 $2,50004/15/151.00%$1,000,000 13

BOND BASICS - THIS BOND IS AT A PREMIUM 04/15/13CouponInterestPaymentsYieldMaturity $1,039, %$15,00010/15/1304/15/15 $15,00004/15/14 $15,00010/15/14 $15,00004/15/151.00%$1,000,000 14

BOND BASICS – SELL THE BOND BEFORE MATURITY: NO RATE CHANGE 04/15/14CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/1304/15/15 $5,00004/15/141.00%$1,000,000 RECEIVE SELL 15 NOTE: Actual results may vary depending on original maturity of bond and length of holding period

BOND BASICS – SELL THE BOND BEFORE MATURITY: RATES WENT DOWN 04/15/14CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/1304/15/15 $5,00004/15/14.50%$1,004,980 RECEIVE SELL 16

BOND BASICS – SELL THE BOND BEFORE MATURITY: RATES WENT UP 04/15/14CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/1304/15/15 $5,00004/15/141.50%$995,050 RECEIVE SELL 17

BOND BASICS - A TYPICAL BOND THAT IS CALLABLE 04/15/13CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/131.00%04/15/15 Callable here$5,00004/15/14 $5,00010/15/14 $5,00004/15/151.00%$1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 18

BOND BASICS - A TYPICAL BOND THAT IS CALLABLE WITH 3 CALL DATES 04/15/13CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/131.00%04/15/15 Callable here, here, and here. $5,00004/15/141.00% $5,00010/15/141.00% $5,00004/15/151.00%$1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 19

BOND BASICS - A CALLABLE BOND, PRICE IS AT A PREMIUM 04/15/13CouponInterestPaymentsYieldMaturity $1,022, %$15,00010/15/1304/15/15 Callable here$15,00004/15/14.75% $15,00010/15/14 $15,00004/15/151.85%$1,000,000 Yield to Call =.75% Yield to Maturity = 1.85% 20

BOND BASICS - A CALLABLE BOND, PRICE IS AT A DISCOUNT 04/15/13CouponInterestPaymentsYieldMaturity $992,080.50%$2,50010/15/1304/15/15 Callable here$2,50004/15/141.30% $2,50010/15/14 $2,50004/15/15.90%$1,000,000 Yield to Call = 1.30% Yield to Maturity =.90% 21

BOND BASICS - A TYPICAL BOND THAT IS CALLABLE 04/15/13CouponInterestPaymentsYieldMaturity $1,000, %$5,00010/15/131.00%04/15/15 Callable here$5,00004/15/14 $5,00010/15/14 $5,00004/15/151.00%$1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 22

BOND BASICS – AFTER YOU BUY A BOND… WHAT HAPPENS NEXT? Investor Wall St Inventory Broker Gives Verbal Order Bond Is Purchased 23

BOND BASICS – AFTER YOU BUY A BOND… WHAT HAPPENS NEXT? Investor Confirmation (Receipt) Broker 24

BOND BASICS – AFTER YOU BUY A BOND… WHAT HAPPENS NEXT? TYPICAL TRADE CONFIRMATION ID : 3128X8EQ1 Settlement : 4/29/13 BUY : $1,00,000 ISSUER : FEDERAL HOME LOAN BANK Security : FHLB /15/15 Price : 100 Yield: 1.00 Principal USD $1,000, Accrued $ (4/15/13 – 4/29/13) Total USD $1,000, Call Feature: Callable one time only on 4/15/14 Call Schedule: Date Price Yield 4/15/ /15/ Maturit y Date Price Yield 4/15/ /15/ Maturit y 25

BOND BASICS – AFTER YOU BUY A BOND… WHAT HAPPENS NEXT? Safekeeping Bank Investor Bond Confirmation Broker Forwards Confirmation Wires $ 26

DELIVERY VERSUS PAYMENT (DVP) IS “BEST PRACTICES” 27

RESOURCE CENTER, DATA AND CHARTS CENTER, DAILY TREASURY YIELD CURVE RATES 28

29

The information provided, while not guaranteed as to its accuracy or completeness, has been obtained from sources believed to be reliable. This is for informational purposes only. Because of individual client requirements, it should not be construed as advice designed to meet the particular needs of any client. This information should not be used as the primary basis of investment decisions. Contact your financial and tax advisors before implementing any strategies outlined in this material. Member SIPC and FINRA. 30