Buying and Selling Bonds

Lesson 13.2

Purchasing bonds through the Federal Reserve

You can buy savings bonds and Treasury securities through the FED

The FED will mail you an application and you will send your check or money order back with your application

The FED uses a system called Treasury Direct to record and store data about Treasury securities and their owners

Treasury Direct System

Securities can be bought online through Treasury Direct at www.treasurydirect.gov

Interest (and principal when bond matures) earned is deposited directly into your account

With Treasury Direct, you can reinvest into new securities after old ones mature

Buying bonds through commercial banks and brokers

U.S. government securities may also be bought through banks or brokers but you will pay a commission

Both Full-service and discount brokers can assist you in purchasing bonds. But, you will receive not advice in your decision to buy or sell

Purchasing municipal bonds through banks and brokers

You can set up a bank account for purpose of buying and selling municipal bonds.

Note: Most banks buy large blocks of municipal bonds and make them available to their customers and there is a fee for this service although it may be incorporated into the price of the bond

Buying bonds through payroll deductions

Some employers will withhold money from your paycheck and when your withholdings are sufficient, the savings bond will be purchased and sent to you.

Note: This process takes longer because your employer will process the money through a bank which in turn purchases the bond.

Most bond options require a minimum investment of $1,000.

Only savings bonds can be purchased with small, regular payments.

3 ways bond investors earn $

Bondholders earn interest each day they hold the bond

Bondholders redeem bonds at face value at maturity

Bondholders can sell their bond before maturity at a price higher than they paid for it as bonds often appreciate in value

What makes bonds a safe investment?

They have a fixed interest rate

They represent a loan that the issuer must repay

Bonds prices tend to remain steadier than do stock prices

Bonds prices tend to react in the opposite direction of stock prices and therefore offset risk of stocks in one’s portfolio

What risk in associated with bonds?

Bonds are not insured, investors can loose their money if the related corporation or municipality defaults.

Who rates bond’s risk level?

Independent Rating services:Moody’s (

www.moodys.com)

Standard & Poor’s (www.standardandpoors.com)

Highest Rating:AAA

Lowest Rating:D (bond is in default)

Facts about Bond Rating

Investment grade bond has a rating of:Baa or higher for Moody’s

BBB or higher in S& P’s

Note: Unfortunately, the higher the bond’s rating, the lower the interest rate you will earn

Lower case letters in ratings indicate more risk than capital letters

What is a Junk Bond

A junk bond is a bond that has a low rating or not rating at all.

Any bond with a rating of Ba /BB or lower is called a junk bond

Junk bonds have higher yields but also can have reasonable level of risk.

Don’t buy junk bonds if you can’t afford to loose your investment

Bond Rating Types

a – senior bond

b – split bond

c – zero coupon bond

d – unsecured bond

E – secured bond

C – Junk Bond

Name Name of the bond

Type/Rating Type of bond/it’s Rating

Coup Fixed Interest Rate (the coupon rate)

Mat The Maturity Date

3 p.m. Bid Final closing bid for the day

Net Chg Compares 3 p.m. bid with previous day

Yld The current yield for the bond (coupon rate divided by average market value)

READING CORPORATE BOND LISTINGS SEE PAGE 316

MORE FACTS ABOUT BONDS

Only factor that has a real effect on bonds: INTEREST RATES

When interest rates rise value of bonds Why?The bonds are paying less in comparison to other fixed-rate investments. Conversely, when interest rates drop, fixed-rate bonds will become attractive because they are“locked-in” at higher rates.