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L09S Investing in Bonds_BB
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Chapter 15
Investing in Bonds
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 15 Learning Objectives
• Describe the characteristics of corporate bonds
• Discuss why corporations __________ bonds
• Explain why investors ___________ corporate bonds
• Discuss _______ federal, state, and local governments issue bonds, and why investors purchase government bonds
• Evaluate bonds when making an investment 15-2
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Characteristics of Corporate Bonds
Objective 1: Describe the characteristics of corporate bonds
• Corporation’s _______________________ to repay a specified amount of money with interest
• The face value is the dollar amount that the bondholder will receive at the bond’s _____________-usually $__________
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Characteristics of Corporate Bonds (continued)
• Bondholders receive interest payments every _______ months at the stated interest rate
• The legal conditions are described in a ___________ ____________
• A __________ is a financially independent firm that acts as the bondholder’s representative
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Why Corporations Sell Bonds Objective 2: Discuss why corporations issue
bonds
• To get funds for major ______________
• To fund ongoing business activities
• When it is difficult or impossible to ____________
• To improve financial _______________
• Interest paid to bondholders is a _______________ business expense that can be used to reduce the federal and state taxes corporations must pay
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Why Corporations Sell Bonds (continued)
TYPES OF BONDS
• Debenture bond – Most corporate bonds are debenture bonds – __________: backed only by the reputation
of the issuing company
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Why Corporations Sell Bonds (continued)
TYPES OF BONDS
• Mortgage bond – A corporate bond that is secured by various
assets of the issuing firm, usually real estate – Interest rate is lower because it is secured
by the __________ and ______________
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Why Corporations Sell Bonds (continued)
• Subordinated debenture bond – An unsecured bond that gives bondholders a
claim _____________ to that of mortgage or debenture bond holders
– with respect to interest payments and ________ assets
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Why Corporations Sell Bonds (continued)
• Convertible bond
– A special kind of corporate bond that can be _____________, at the owner’s option, for a specified number of shares of the corporation’s _______________
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Why Corporations Sell Bonds (continued)
• High Yield bond – A bond that pays a higher _______________
but, has a higher __________________.
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Why Corporations Sell Bonds (continued)
PROVISIONS OF REPAYMENT • Call Feature
– Corporation can _____________ or ___________ outstanding bonds from current bondholders before the maturity date
– Most agree not to call bonds for the first 5 to 10 years after they are issued
– Bonds are typically called if their interest rate is much _____________ than the going rate
– Most corporate bonds are ____________
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Why Corporations Sell Bonds (continued)
• Sinking fund – Corporations ________________ in this fund
annually or semiannually and use the money to pay off the bondholders when the bond issue comes __________
• Serial bonds – Bonds of a single issue that mature on
___________ dates
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Why Investors Buy Corporate Bonds
Objective 3: Explain why investors purchase corporate bonds
• Interest Income – Investors receive interest every ___________ – The annual interest is computed by
multiplying the interest rate by the face value of the bond
– Registered bonds, Registered Coupon bond, Bearer bonds, __________________ bonds
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Why Investors Buy Corporate Bonds (continued)
• _________________________ of Bond Value – May be able to sell the bond to someone else at
a higher price if the interest rate on the bond is _______________ than the market rate
– Approximate Market Value = Dollar amount of annual interest / Comparable interest rate.
– Bond ladders
• Bond face amount will be ____________________ 15-14
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Why Investors Buy Corporate Bonds (continued)
THE MECHANICS OF A BOND TRANSACTION
• Bonds can be held until maturity or sold in the _________________ market
• Most bonds sold through full-service brokerage firms, discount brokerage firms, or the Internet
• Generally a minimum commission of $5-$35 on a $1,000 bond
• Interest and capital gains from selling bonds are both taxable
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Government Bonds and Debt Securities
Objective 4: Discuss why federal, state, and local governments issue bonds, and why investors purchase government bonds
• Sold to obtain money to finance the national debt, and the ongoing costs of government
• Three levels of ______ government issue bonds: – Federal-no state income tax on the interest – State – Local municipalities
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Government Bonds and Debt Securities
TREASURY BILLS, NOTES, AND BONDS
Treasury Bills (T-Bills) – US$100 minimum – 4, 13, 26, or 52 weeks to mature – Sold at a _____________
Treasury Notes (T-Notes) – US$100 units – 2, 3, 5, 7, and 10 year terms – Interest paid every six months
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Government Bonds and Debt Securities (continued)
Treasury Bonds
• Issued in minimum units of $100
• Have maturities of 30 years
• Interest rates are generally ______ than those of T-bills and T-Notes
• Interest is paid every ____ months
• Held until maturity or sold before maturity
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Government Bonds and Debt Securities (continued)
Hong Kong Government i-Bond (Inflation Bond)
• Issued in minimum units of HK____________
• Sold in ____________ terms
• Valued based upon the _________________
• Interest is paid every ___ months, and will vary
• Held until maturity or sold before maturity • http://www.hkgb.gov.hk/en/index.html
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Government Bonds and Debt Securities (continued)
FEDERAL AGENCY DEBT ISSUES
• Fannie Mae (http://www.fanniemae.com/) – Federal National Mortgage Association
• Ginnie Mae - pay interest once a month – Government National Mortgage Association
• Freddie Mac – Federal Home Loan Mortgage Corporation
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Government Bonds and Debt Securities (continued)
FEDERAL AGENCY DEBT ISSUES (continued)
• Slightly higher risk than Treasury securities, so slightly higher interest rates
• Issued for 1-30 years, 12 year average
• Minimum denominations may be as high as $10,000-$25,000
• Agency debt is __________ before maturity
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The Decision to Buy or Sell Bonds
Objective 5: Evaluate bonds when making an Investment
THE INTERNET • The Internet can be used in the following ways to
evaluate a bond – Obtain the___________________ – Trade bonds online for a lower commission – Research information on the corporation or
government bond issues online
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The Decision to Buy or Sell Bonds (continued)
• Some relevant US Websites are: http://www.bonds-online.com/ http://www.emuni.com/ http://www.buysellbonds.com/ http://www.fmsbonds.com/ http://www.municipalbonds.com/
http://www.investinginbonds.com/
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The Decision to Buy or Sell Bonds
(continued)
OBTAINING ANNUAL REPORTS
• _________ or _______the corporation to receive the annual report
• Corporations maintain __________ that provides access to annual reports
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The Decision to Buy or Sell Bonds (continued)
BOND RATINGS
• Bond ratings provide ________ and _______ associated with bond issues
• _________________ Investor Service Inc., • _________________ Corporation, and • _________________ provide bond ratings
• Bond ratings generally range from _________
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The Decision to Buy or Sell Bonds (continued)
BOND YIELD CALCULATIONS
• _______ is the rate of return earned by an investor who holds a bond for a stated period
Current yield on corporate bond = ___________________
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The Decision to Buy or Sell Bonds (continued)
$ Amt. Annual Interest + Face value - Market value Number of periods Market value + Face value 2
Example: $60 + $1,000 - $900 10 $900 + $1,000 2 = 0.074 = 7.4%
Yield to Maturity Calculation:
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End of Lecture
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