Investing in Bonds

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INVESTING IN BONDS


What is a bond?  

A bond is a debt security; kind of like an “IOU.” If you buy a bond you are lending money to the government or other issuers within the bond market such as corporations. The issuer promises to pay back the face value of the bond plus interest to the investor.


What kind of bonds are out there? 

   

United States Government Securities: Treasury Bills, Treasury Notes, Treasury Bonds Corporate Bonds: Issued by corporations to raise capital Municipal Bonds: Issued by state and local government Callable Bonds Serial Bonds Convertible Bonds Zero-coupon Bonds


Why should you invest in Bonds?  

 

Bonds can provide a predictable income stream Bonds can help you preserve your capital investments Conservative investment option (they are less volatile then stocks) Low Risk: “Make money the boring way” Some bonds are Tax-Free and can be used to lower tax liability


When should you invest in bonds?  

The earlier the better The earlier you start the more retirement income you have to look forward to later on in life.


Where to buy a bond? 

Some banks offer services dealing with government bond transactions You can buy directly from the government through Treasury Direct: www.treasurydirect.gov Through brokers in the “over the counter market”


How much can you buy a Bond for? 

  

An individual can buy a Bond under specific monetary denominations These denominations include: $10 $25 $50 $75 $100 $200 $500 $1000 $5000 $10000


When do bonds mature?  

  

Can range from 0 to 100 years Majority of bond maturities range from 1 to 30 years Short-Term Bonds: 1 to 3 years Intermediate-Term Bonds: 4 to 10 years Long-Term Bonds: greater than 10 years


Government VS Corporate Bonds 

 

Government bonds have a lower risk than Corporate bonds Lower risk = Lower return Corporate Bonds have more risk due to the possibility of a corporation filing for bankruptcy Corporate Bonds offer higher interest rates due to the added risk


Types of Government Bonds  1) 2)

3)

Treasury Bills (T-Bills) Maturities less than 1 year (4, 13, 26, 52 weeks) Discounted Security: Pay less than Face Value up front and receive Face Value at maturity, Interest paid = Difference between prices Usually done in increments of $100


Types of Government Bonds  1) 2)

3) 4)

Treasury Notes More like traditional bonds Pay a specific amount at maturity and regular interest payments before maturity Maturities range from 1 to 10 years Interest paid every 6 months


Types of Government Bonds  1) 2) 3) 4)

5)

Treasury Bonds Have face values of $100 Typically have maturities of 30 years Pay interest every 6 months Offer higher interest rates because of the longer maturities Treasury Inflation Protected Securities: Protect against effects of inflation, and returns are exempt from state tax


Types of Government Bonds  1) 2) 3)

Series EE Savings Bonds Exempt from state and local income taxes Great Long Term Saving tool Pay interest for up to 30 years based on current market rates


Example of Series EE Savings Bond


Treasury Direct Website 

http://www.treasurydirect.gov/indiv/tools/tools_es timationcalc.htm


Types of Corporate Bonds 

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Most corporate bonds have a face value of $1000 that is paid back at maturity Also pay interest every 6 months Purpose is to raise capital for the corporation


Types of Corporate Bonds  1) 2) 3)

 1) 2)

3)

Debenture Bonds Backed by nothing but reputation of company Most corporate bonds are debenture bonds More risk Mortgage Bonds Safer than debenture bonds Backed by real assets: Real Estate, Stocks, Bonds, Operating Equipment If company defaults assets can be sold to pay back the investor


Types of Corporate Bonds  1) 2)

3)

Convertible Bonds Can be converted to company stock If company does well investor may want to convert their bonds to company stock Stock offers higher returns than bonds and the option to convert can be advantageous to the investor


Types of Corporate Bonds  1)

2)

3)

4)

Callable Bonds Offered by corporations when interest rates are high = higher returns for investor If interest rates drop can be bought back by company before maturity This option benefits the company and not the investor If interest rates stay high advantage to investor


Researching Bonds 

 1) 2) 3) 4)

Most common way to research bonds is through the internet Many internet resources such as: www.moodys.com www.standardandpoors.com (S&P) www.morningstar.com www.finance.yahoo.com


Researching Bonds  1) 2) 3) 4) 5) 6)

Many of these sites share: Bond Ratings (Investment grade/Junk) Market Indexes (S&P 500) Performance Risk Indicators Expert Advice Financial News


Bond Ratings 

Standard & Poor’s Corporation (S&P) is an Agency that rates Bonds

AAA

AA+/AA/AA-

A+/A/A-

BBB+/BBB/BBB BB+ -

Prime, Maximum Safety

High Grade High Quality

Upper Medium Grade

Lower Medium Grade

Non Investm ent Grade

BB/BB-

B+/B/B-

CCC+

CCC/CCC-

D

Substantial Risk

In Poor Standing

Default

Speculative Highly Speculative


Quick Points 

  1) 2) 3)

Another way to invest in bonds is through mutual funds Bond Funds pay interest every month instead of every six months Professionally managed Popular Mutual Fund Brokers include: T. Rowe Price Vanguard Schwab


Conclusion 

In conclusion, bonds are a safe way to invest your money without taking huge financial risks. Government and Corporate bonds are two of the most popular ways to invest your money. There are many resources available to research the right bond for your investment needs Mutual Funds are a great way to invest in bonds


Works Cited 

http://finance.yahoo.com/bonds

http:/www.bonds.yahoo.com

http://www.treasurydirect.gov/indiv/planning/plan_gifts.htm

http://www.investinginbonds.com/learnmore.asp?catid=46&id=2

http://www.investopedia.com/articles/00/111500.asp

http://finance.yahoo.com/education/bond/article/101197/Types_of_Bonds

http://www.treasurydirect.gov/BC/SBCPrice

http://financial-dictionary.thefreedictionary.com

http://www.bondsonline.com/Bond_Ratings_Definitions.php

http://www.rlrouse.com/bonds.html

www.standardandpoors.com

www.moodys.com


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