Bonds
• Are Loans that must be repaid at maturity.
• Corporations must make interest
payments on bonds.
• Bondholders receive interest twice a year.
• When the bond matures on in its maturity
date, the principal is repaid.
Face Value
• Is the amount the bondholder will be
repaid at maturity.
Corporate Bonds
• Are sold on the open market through
brokers, just like stocks.
• Bonds are “Fixed-income investments”
• A bonds interest rate is the percentage of
face value that the bondholder will receive
as interest each year.
Registered Bond
• Is recorded in the owner’s name by the
issuing company.
Coupon Bond
• Is not registered by the issuing company.
• Most bonds are registered.
Bond cost
• Most bonds are sold in units of $1,000 and
up.
Callable bond
• Is a bond that the issuer has the right to
pay off before its maturity date.
• Corporations usually agree not to call
bonds for the first five years after
issuance.
Types of Corporate Bonds
• Debenture – is a corporate bond that is not
backed by collateral but only by the general
credit standing of the corporation.
• Mortgage Bond – (secured bond) is a corporate
bond backed by specific assets as collateral to
assure repayment of the debt.
• Convertible Bond – is a corporate bond that the
bondholder can choose to exchange for a
specified number of shares of the corporation’s
common stock.
Premium
• Bonds sell for more that their face value.
Discount
• For an amount lower than face value. This
happens when a bond yielding 6% when
current interest rates are higher than 6%
and rising.
Government Bonds
1) Municipal – Issued by state and local
governments
2) General Obligations – is a municipal
bond backed by the power of the issuing
state or local government to levy taxes to
pay back the debt.
3) Treasury
4) Savings -
5) Federal agency bonds
Zero-Coupon Bond
• Is a bond that is sold at a deep discount,
makes no interest payments, and is
redeemable for its face value at maturity.
• The bondholders make money by selling
the bonds before maturity at a price higher
than they paid for them.
Buy and Sell Bonds
• Full Service broker – charge a
commission, and offer advice.
• Discount Broker – Charge smaller fee or
commission, but no advice.
• You can buy savings bonds and Treasury
securities through the Federal Reserve
System. Also TreasuryDirect.gov
• Also buy through banks.
Evaluating Bonds
• AAA – Highest Rating
• D – Lowest Rating
• A D rating indicates that the bond is in default.
• Bonds are not insured, so investors can lose
their money.
• Investment-grade bond – Anything rated Baa or
higher in Moody’s, or BBB or higher in Standard
& Poor’s. Considered Safe.
Junk Bond
• Is a bond that has a low rating, or no rating
at all.
• Any bond with a rating of Ba/BB or lower is
called a junk bond.
• Highly Speculative.
Reading Listings
Type of Bond
• a – senior bond
• b – split coupon
• c – zero coupon bond
• d – unsecured bond
• e – secured bond