1. Investing in Bonds

2. Objectives
Describe bonds and how they are used by corporations and investors.
Describe the major characteristics of bonds.
Differentiate among the four general types of bonds.

3. Objectives
Describe what the investor should consider before investing in bonds, particularly the current yield and yield to maturity.
List the advantages and disadvantages of investing in bonds.

4. Descriptive Terms for Bond Features
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5. Language of Bond Investing
Registered and bearer
Zero-coupon
Callable
Warrants
Convertibility

6. Language of Bond Investing
Indenture
Face value, coupon rate, maturity date
Secured and unsecured
Senior and subordinated

7. Interest Income
Assume you purchase $1,000 corporate bond issued by AT&T Corporation. The interest rate for this bond is 6.70%. The annual interest is $67 as shown below:
Dollar amount of annual return = Face value x interest rate
= 1,000 x 6.7%
= 1,000 x .067
= $67.00

8. Types of Bonds Corporate bonds U.S. government securities
Treasury bills, notes, and bonds
Federal agency issues
Municipal Bonds

9. Approximate Bond Value
Assume you purchase a Verizon Communications bond that pays 5.5% interest based on a face value of $1,000 until maturity in Also assume new corporate bond issues of comparable quality are currently paying 7%. The approximate market value of your Verizon bond is $786 calculated as follows:
Dollar amount of annual interest = $1,000 x 5.5% = $55
Approximate market value = Dollar amount of annual interest
Comparable interest rate
= $55 7%
= $786

10. Current Yield Current yield = current annual income
current market price
= $55
$786
= 7%

11. State and Local Government Securities
Municipal Bonds
General Obligation Bonds
Revenue Bonds

12. Effective Yield of a Tax-Free Investment
Not paying tax effectively increases your rate of return
you get to keep all of your profits, instead of only a portion
Example: 28% tax bracket, 5% rate of return
= 6.94%

13. What is the Yield or Rate of Return on a Financial Investment?
Annualized Percentage Change:
Example: original price=$20/share, current price=$100/share, stock held for 9 years

14. Comparison of Taxable vs Tax Exempt Investments
Tax-Exempt Yield
15% Tax Rate
25% Tax Rate
28% Tax Rate
33% Tax Rate
35% Tax Rate 4%
4.71%
5.33%
5.56%
5.97%
6.15% 5%
5.88%
6.67%
6.94%
7.46%
7.69% 6%
7.06%
8.00%
8.33%
8.96%
9.23% 7%
8.24%
9.33%
9.72%
10.45%
10.77%

15. What is the Yield or Rate of Return on a Financial Investment?
=19.58%

16. Bond Price Calculation
Assume that a bond has a price quote of 84. The actual price for the bond is $840, as calculated below:
Bond price = Face value (usually $1,000) x bond quote
= $1,000 x 84 percent
= $1,000 x .84
= $840

17. that it is likely to be downgraded.
Bond Ratings
A plus sign (“+”) following a rating indicates that it is likely to be upgraded, while a minus sign (“-“) following a rating indicates
that it is likely to be downgraded.
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18. Considerations Before Investing in Bonds
Susceptibility to certain risks
Credit
Callability
Inflation
Interest rate

19. Considerations Before Investing in Bonds
Premiums and discounts
Current yield
Yield to maturity
Tax-equivalent yields
When to sell

20. Bond Prices, Bond Yields, and Interest Rates
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21. Yield to Maturity

22. Effective Yield of a Tax-Free Investment
Not paying tax effectively increases your rate of return
you get to keep all of your profits, instead of only a portion
Example: 28% tax bracket, 5% rate of return
= 6.94%

23. Advantages of Investing in Bonds
Pay higher interest rates than savings
Offer safe return of principle
Have less volatility than stocks
Offer regular income
Require smaller initial investment

24. Disadvantages of Investing in Bonds
No hedge against inflation
Can be quite volatile
Compounding is almost impossible
Subject to investors tax rate
Poor marketability

25. Bond Characteristics and Risk
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