Why does the government issue bonds and securities? Raise money they need to operate the government...
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Transcript of Why does the government issue bonds and securities? Raise money they need to operate the government...
Why does the government issue bonds and securities?
• Raise money they need to operate the government and finance the debt
Government Bonds Government Bonds and Securitiesand Securities
Security T-Bills T-Notes T-Bonds TIPS
Units Issued
Units of $1000
Units of $1000
Units of $1000
Units of $100
Matures Every 4, 13, 26, 52 weeks
1-10 years 30 years 5, 10, 20 year
Interest Rates
Discounted Security – Actual price you pay is less than face value of T-Bill
Higher Interest rates than T-Bills - you wait longer to get your money back
Higher Interest rates than T-Bill andT-Notes
Principal increases with inflation and decreases with deflation
Government Bonds Government Bonds and Securitiesand Securities
Series EE Savings Bonds Series I Savings Bonds
Price ½ of its face value Pay face value
Matures 6 months to 30 years 5 – 30 years
InterestRates
Depends on going rate at purchase
Fixed interest rate lower than EE Bonds but increases with inflation
Interest Earned
Not taxed on interest earned until you cash the EE Bond
If you cash out theI Bond before 5 years, there is a penalty
Government Bonds Government Bonds and Securitiesand Securities
Federal National Mortgage Association (Fannie Mae)
Government National Mortgage Association (Ginnie Mae)
Average Maturity of 12 yearsMinimum of $25,000Very low riskHigher interest rate than other Treasury Securities
Municipal bondMunicipal bond (or muni)— *Security issued by a state or local (town, city, county) government
*Used to pay for major projects, such as airports, schools, and highways.
*Exempt from Federal Tax
Government Bonds Government Bonds and Securitiesand Securities
General obligation bondGeneral obligation bond— a bond that is backed by the
government that issued it.
Government Bonds Government Bonds and Securitiesand Securities
Revenue bondRevenue bond—a bond that is repaid from the income generated by the project it is designed to finance. i.e. Toll Road
Bond issues are rated or evaluated by independent rating companies.
The two best-known sources of bond ratings are Moody’s Bond Survey and Standard & Poor’s Stock and Bond Guide.
The Investor’s Decision The Investor’s Decision to Buy or Sellto Buy or Sell
Quality Moody’s Standard & Poor
Description
High Grade
Aaa AAA Best Quality, Lowest risk, Most secure principal and interest
Aa AA High Quality, Less secure than high grade
Medium Grade
A A Favorable attributes, adequate security
Baa BBB Neither highly protected or poorly secured
Quality Moody’s Standard & Poor
Description
Speculative
Ba BB Risky elements; moderate protection of principal and interest
B B Lacks characteristics of a good investment; questionable payout of principal and interest
Default Caa CCC Poor standing; high probability of no payout
Ca CC Highly risky
C Lowest class of Moody; very poor investment
C S&P company filed for bankruptcy
D Bond issues in default; really bad