Chapter 15

Investing in Bonds

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

15-1

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

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

15-8

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 _______________

15-9

Why Corporations Sell Bonds (continued)

•  High Yield bond – A bond that pays a higher _______________

but, has a higher __________________.

15-10

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

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

15-19

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

15-20

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 _________

15-25

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 = ___________________

15-26

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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