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