BONDS 101 PUBLIC FUNDS INVESTING

BONDS 101PUBLIC FUNDS

INVESTINGPrepared for:

Presented by:

Paul JarvisManaging Director

206-365-3000877-707-7787

Member SIPC and FINRA. 1 1

2 2Source: Bloomberg

BOND BASICS - WHAT IS A BOND?

$100 1 Year 10.00% = 110 10%

4 4

BOND BASICS - WHAT IS A BOND?

Bond Buyer(Lender)

Bond Issuer

(Borrower)

$100 1 Year 10.00% =

110 (Fixed) 10%

5 5

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)


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)


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)


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

10 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

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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

12 12

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

13 13

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

15 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

04/15/14

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

16 16

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%

18 18

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



19 19

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%


20 20

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


Yield to Maturity = .90%

21 21

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



22 22

BOND BASICS – AFTER YOU BUY A BOND…WHAT HAPPENS NEXT?

InvestorWall St

Inventory

Broker

GivesVerbal Order Bond Is

Purchased

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Investor

Confirmation(Receipt)

Broker

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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

25 25

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

28 28

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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BONDS 101 PUBLIC FUNDS INVESTING

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