Bonds

Fixed Income Security A type of investment that provides fixed interest payments and the return of the principal payment (original amount given, aka par value/face value) at maturity

Bond A fancy IOU When you buy a bond, you are lending money to the bond issuer (government or corporation) for a specific period of time in exchange for a specific interest rate

Coupon versus Zero Coupon Coupon Bond – a type of bond whereupon: Interest (coupon) is paid every 6 months The face value/par value/prinicipal is paid at maturity date (6 months to 30 years) Zero Coupon Bond No periodic interest Buy bond at a reduced price get full value at maturity date (get all the interest at the end) Shorter terms

TYPES

Government Bonds Municipal bonds: backed by other units of government (town, municipality, boroughs) US Treasury Bonds: Backed by US government (government securities) Bonds – 30 years – coupon Notes – 2, 3,5, 7, 10 years – coupon Bills – a few days to 52 weeks – usually zero coupon

Corporate Bonds Backed by a private company Types  Investment Grade: highly rated companies  Junk Bonds: lower rated companies More risk = more return

Selling Bonds Safe: wait until maturation & guaranteed money Aggressive: sell before maturation to make additional money (could also lose money)  If interest rates are higher NOW than when bought bond then your bond is worth less.  If interest rates are lower now than when you bought bond then your bond is worth more.

Why Bonds Matter Not only investments Government can use bond market to control the economy, interest rates When government has “buy back” and buys lots of bonds – leads to lower interest rates (possible inflation) When government issues/sells bonds – leads to higher interest rates (reduce inflation)