1. MYPF Bonds are ? that must be repaid at maturity.13
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Investing in Bonds
Bonds are ? that must be repaid at maturity.
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2. GOALS Discuss the features, types, and earnings on corporate bonds.
Describe the different types of government bonds.
Explain how to buy and sell bonds, considering both risk and return.
Explain how to read the bond listings of financial pages.
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3. Face Value and Maturity Date
? is the amount the bondholder will be repaid at maturity.
? is the date the bond must be repaid.
Bond maturities typically range from ? years.
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4. Contract Rate
A bond’s ? (also called its ? ) is the percentage of face value that the bondholder will receive as interest each year.
Usually, payments of ? the annual interest are made twice a year.
Interest received on corporate bonds is ?.
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5. Features of Corporate Bonds
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Features of Corporate Bonds
? bonds are sold on the open market through brokers, just like ?.
Bonds are known as “?.”
Pay a specified amount of ? on a regular schedule.
A bond’s interest ?.
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6. Features of Corporate Bonds
(continued)
A ? is a bond that the issuer has the right to ? (call back) before its maturity date.
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7. Types of Corporate Bonds
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8. Debenture
A ? is a corporate bond that is based on the general ? of the company. “promise”
The issuer does not pledge any specific assets to assure repayment of the loan.
Debentures are considered ? bonds.
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9. Secured Bond
A ?, also called a ? bond, is backed by specific assets which serve as ? to assure repayment of the debt.
If the corporation fails to repay the loan as agreed, the bondholder may claim the property used as security for the debt.
The asset most often used for security is ?, or some other type of ?.
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10. Convertible Bond
A ? is a ? bond that can be converted to ? of common ?.
If the bondholder converts to common stock, the bond is ? due and payable at maturity.
? bonds can be exchanged for a ? of common shares at a specific price per share.
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11. Earnings on Corporate Bonds
All corporate bonds are issued with a stated ? and ?.
There is no ?.
Half the annual amount of simple interest is paid every ? months.
While the ? rate on your bond is fixed, the ? (what you could ? it for) can change.
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12. Government Bonds M S T A
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13. Municipal Bonds A bond issued by ? and ? is called a ? bond.
? bonds are also known as “?.”
? bonds generally pay a lower interest rate than ? bonds.
However, the interest is ? from federal taxes (and often state and local taxes as well), so the effective rate is higher than the stated rate.
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14. Types of Municipal Bonds
A ? bond is a municipal bond issued to raise money for a ?.
The revenues (income) generated by the project are used to pay the interest and repay the bonds at maturity.
Major projects financed by revenue bonds include airports, hospitals, toll roads, and public housing facilities.
A ? bond (or GO) is a municipal bond backed by the power of the issuing state or local government to levy taxes to pay back the debt.
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15. Comparing Taxable and Tax-Exempt Bonds
Corporate Bond
Municipal Bond
Face Value (Principal)
$10,000
Rate of Interest 6% 5%
Amount of Annual Interest
$600
$500
Tax on Interest Earned (28%)
$168 $0
Net Interest
$432
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16. Savings Bonds You can buy U.S. savings bonds three ways:
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Savings Bonds
You can buy U.S. savings bonds three ways:
From commercial banks
Through payroll deduction plans
Directly from a Federal Reserve Bank
Series EE
Series I
Series EE
Series EE bonds are sold at one half of their face value. Investors who buy these bonds often hold them to maturity.
These bonds are issued with maturity values that range from $50 to $10,000.
Series I
Series I bonds are sold at face value and have fixed plus variable rates of return that increase as general interest rates rise.
This helps protect you from the effects of rising prices (inflation).
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17. Treasury Securities
Treasury securities are virtually ?, since they have the backing of the ?
They are taxable at the federal level but are exempt from state and local taxes and are usually not callable.
Types of treasury securities
Treasury ?
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18. MYPF
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Agency Bonds
When you purchase an ? bond, you are ? money to a ? agencies.
Federal agencies that issue bonds include:
Federal Home Loan Mortgage Corporation (?)
Federal National Mortgage Association (?)
Federal Housing Administration (?)
Student Loan Marketing Association (?)
The agencies use this funding to provide low-cost financing to certain groups of people.
Agency bonds are basically risk-free and they offer a slightly higher yield than securities issued by the Treasury.
Agency bonds are usually exempt from state and local taxes, but not federal tax
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19. Buying and Selling Bonds
Full-service broker
Discount broker
Banks
Federal Reserve System
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20. Return on Bonds Earn ?for each day they own the bond.
Redeem the bond for its ? at ?.
Bond ? occurs when it is paid off at maturity.
The issuer of the bond pays back the ? amount that was borrowed.
Sell a bond before ?.
Bonds often appreciate in value, especially when interest rates are dropping.
Bondholders may be able to sell the bond before maturity for a price higher than they paid for it.
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21. MYPF
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Return on Bonds
(continued)
Bonds are a ? investment than many other choices because they have a fixed interest rate and represent a loan that the issuer must repay.
Bond prices tend to remain steadier than do stock prices.
Also, bond prices tend to react in the opposite direction of stock prices.
Bond investments serve as a hedge to help offset the risk of the stocks in your portfolio.
A hedge is any investment or action that helps offset against loss from another investment or action.
Hedging is a tactic used to reduce overall risk.
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22. Risk on Bonds
To help investors evaluate the risk level of different bonds, independent rating services rate bonds according to their safety.
A bond ? tells the investor the risk category that has been assigned to a bond.
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23. Risk on Bonds
(continued)
Bond rating services base their ratings on the financial condition of the issuing corporation or municipality.
Bond ? means that the bond issuer cannot meet the interest and/or principal payments.
Because bonds are not insured, investors can ? their money if the corporation or municipality ?.
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24. Investment-grade Bonds
A bond with a rating of Baa or higher in Moody’s, or BBB or higher in Standard & Poor’s, is considered an investment-grade bond.
? bonds are considered the highest-quality, lowest-risk bonds.
The higher the bond’s rating, the lower the interest rate you will earn.
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25. Reading Corporate Bond Listings
Excerpt from stock exchange (bond) listings:
Name
Type/ Rating
Coup.
Mat.
3 p.m. Bid
Net Chg.
Yld 1 2 3 4 5 6 7
AK Steel
a/BB
9.125
12/08
98½
unch
9.46
Allied Waste
b/B+
10.000
8/11
102
9.57
Am Std
a/BB+
7.375
2/10
–1¼
7.56
Chanclr
b/BB+
8.125
12/09
103
7.36
Echostar
a/B
9.375
2/11
101¼
9.52
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26. Zero-Coupon Bonds
A zero-coupon bond is sold at a deep discount, makes ? payments, and is redeemable for its face value at maturity.
These bonds may also be issued by the U.S. government or municipalities.
As the bond progresses toward maturity, it may appreciate, or increase in value.
The bondholders make money by selling the bonds before ? at a price ? than they paid for them.
Or, they can hold the bonds to ? and ? the face value and interest.
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27. Junk Bond A ? bond has a ? rating, or no rating at all.
Any bond with a rating of Ba/BB or lower is called a junk bond.
Because of its low or no rating, this type of bond is ?.
In most cases, interest rates on junk bonds are high because they are high ?, since the companies issuing them are ? financially sound.
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