Post on 16-Dec-2015
BONDS 101PUBLIC FUNDS
INVESTINGPrepared for:
Presented by:
Paul JarvisManaging Director
206-365-3000877-707-7787
Member SIPC and FINRA. 1 1
2 2Source: Bloomberg
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BOND BASICS - WHAT IS A BOND?
$100 1 Year 10.00% = 110 10%
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BOND BASICS - WHAT IS A BOND?
Bond Buyer(Lender)
Bond Issuer
(Borrower)
$100 1 Year 10.00% =
110 (Fixed) 10%
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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%
6 6
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)7 7
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%
8 8
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)9 9
BOND BASICS - WHEN RATES GO DOWN, PRICES NECESSARILY GO UP
Bond Maturity
Value $110
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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
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BOND BASICS - A TYPICAL BOND
Don’t forget about interest on interest….
04/15/13
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/13 04/15/15
$5,000 04/15/14
$5,000 10/15/14
$5,000 04/15/151.00
%$1,000,0
00
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BOND BASICS - THIS BOND IS AT A DISCOUNT
04/15/13
Coupon
Interest
Payments
Yield Maturity
$990,012
.50% $2,500 10/15/13 04/15/15
$2,500 04/15/14
$2,500 10/15/14
$2,500 04/15/15 1.00%$1,000,0
00
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BOND BASICS - THIS BOND IS AT A PREMIUM
04/15/13
Coupon
Interest
Payments
Yield
Maturity
$1,039,500
3.00%$15,00
010/15/13 04/15/15
$15,000
04/15/14
$15,000
10/15/14
$15,000
04/15/151.00
%$1,000,0
00
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BOND BASICS – SELL THE BOND BEFORE MATURITY: NO RATE CHANGE
04/15/14
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/13 04/15/15
$5,000 04/15/141.00
%$1,000,0
00
RECEIVE
SELL
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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
04/15/14
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/13 04/15/15
$5,000 04/15/14 .50%$1,004,9
80
RECEIVE
SELL
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BOND BASICS – SELL THE BOND BEFORE MATURITY: RATES WENT UP
04/15/14
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/13 04/15/15
$5,000 04/15/141.50
%$995,050
RECEIVE
SELL
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BOND BASICS - A TYPICAL BOND THAT IS CALLABLE
04/15/13
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/131.00
%04/15/15
Callable here $5,000 04/15/14
$5,000 10/15/14
$5,000 04/15/151.00
%$1,000,0
00Yield to Call = 1.00%
Yield to Maturity = 1.00%
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BOND BASICS - A TYPICAL BOND THAT IS CALLABLE WITH 3 CALL DATES
04/15/13Coupo
nInteres
tPayment
sYield Maturity
$1,000,000
1.00% $5,000 10/15/131.00
%04/15/15
Callable here,here, and here.
$5,000 04/15/141.00
%
$5,000 10/15/141.00
%
$5,000 04/15/151.00
%$1,000,0
00Yield to Call = 1.00%
Yield to Maturity = 1.00%
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BOND BASICS - A CALLABLE BOND, PRICE IS AT A PREMIUM
04/15/13
Coupon
Interest
Payments
Yield
Maturity
$1,022,370
3.00%$15,00
010/15/13 04/15/15
Callable here$15,00
004/15/14 .75%
$15,000
10/15/14
$15,000
04/15/151.85
%$1,000,0
00Yield to Call = .75%
Yield to Maturity = 1.85%
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BOND BASICS - A CALLABLE BOND, PRICE IS AT A DISCOUNT
04/15/13
Coupon
Interest
Payments
YieldMaturit
y
$992,080 .50% $2,500 10/15/13 04/15/15
Callable here $2,500 04/15/141.30
%
$2,500 10/15/14
$2,500 04/15/15 .90%$1,000,0
00Yield to Call = 1.30%
Yield to Maturity = .90%
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BOND BASICS - A TYPICAL BOND THAT IS CALLABLE
04/15/13
Coupon
Interest
Payments
YieldMaturit
y
$1,000,000
1.00% $5,000 10/15/131.00
%04/15/15
Callable here $5,000 04/15/14
$5,000 10/15/14
$5,000 04/15/151.00
%$1,000,0
00Yield to Call = 1.00%
Yield to Maturity = 1.00%
22 22
BOND BASICS – AFTER YOU BUY A BOND…WHAT HAPPENS NEXT?
InvestorWall St
Inventory
Broker
GivesVerbal Order Bond Is
Purchased
23 23
BOND BASICS – AFTER YOU BUY A BOND…WHAT HAPPENS NEXT?
Investor
Confirmation(Receipt)
Broker
24 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 1.00 4/15/15 Price : 100 Yield: 1.00Principal USD $1,000,000.00 Accrued $388.89 (4/15/13 – 4/29/13)Total USD $1,000,388.89Call Feature: Callable one time only on 4/15/14 Call Schedule: Date Price Yield 4/15/14 100 1.00 4/15/15 100 1.00 Maturity
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BOND BASICS – AFTER YOU BUY A BOND… WHAT HAPPENS NEXT?
Safekeeping Bank
Investor Bond
Confirmation
Broker
Forwards Confirmatio
n
Wires $
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DELIVERY VERSUS PAYMENT (DVP) IS “BEST PRACTICES”
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WWW.TREASURY.GOV, RESOURCE CENTER, DATA AND CHARTS CENTER, DAILY TREASURY YIELD CURVE RATES
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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.
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