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Mutual Fund Strategies by gqm11330

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									Investing in Bonds
Objectives
   Describe bonds and how they are used by
    corporations and investors.

   Describe the major characteristics of
    bonds.

   Differentiate among the four general types
    of bonds.
Objectives
   Describe what the investor should
    consider before investing in bonds,
    particularly the current yield and yield to
    maturity.

   List the advantages and disadvantages of
    investing in bonds.
Descriptive Terms for Bond Features




         ., REVIEW BOOK: Personal Finance. Retrieved Oct 1, 2009 from http://www.flatworldknowledge.com/node/50890   .
Language of Bond Investing

   Registered and bearer
   Zero-coupon
   Callable
   Warrants
   Convertibility
Language of Bond Investing

   Indenture

   Face value, coupon rate, maturity date

   Secured and unsecured

   Senior and subordinated
Interest Income
   Assume you purchase $1,000 corporate
    bond issued by AT&T Corporation. The
    interest rate for this bond is 6.70%. The
    annual interest is $67 as shown below:

  Dollar amount of annual return = Face value x interest rate
                                 = 1,000 x 6.7%
                                 = 1,000 x .067
                                 = $67.00
Types of Bonds
   Corporate bonds

   U.S. government securities
     Treasury bills, notes, and bonds
     Federal agency issues

   Municipal Bonds
Approximate Bond Value

   Assume you purchase a Verizon Communications
    bond that pays 5.5% interest based on a face value
    of $1,000 until maturity in 2017. Also assume new
    corporate bond issues of comparable quality are
    currently paying 7%. The approximate market value
    of your Verizon bond is $786 calculated as follows:

  Dollar amount of annual interest = $1,000 x 5.5% = $55
  Approximate market value = Dollar amount of annual interest
                                 Comparable interest rate
                             = $55
                                7%
                             = $786
Current Yield
   Current yield = current annual income
                    current market price
                 = $55
                   $786
                 = 7%
State and Local Government
Securities
  Municipal Bonds

        General Obligation Bonds

        Revenue Bonds
Effective Yield of a Tax-Free
Investment
 Not paying tax effectively increases your rate of
  return
    you get to keep all of your profits, instead of only
     a portion

                r       
        1  taxbracket 100
                        
 Example: 28% tax bracket, 5% rate of return
         .05 
         1  .28 100
                  
= 6.94%
   What is the Yield or Rate of Return on a
            Financial Investment?
 Annualized Percentage Change:


                           1
    new  old          n
  1            1  100
     old          
                      
  Example: original price=$20/share, current
   price=$100/share, stock held for 9 years
Comparison of Taxable vs Tax
Exempt Investments
    Tax-    15%     25%     28%      33%      35%
   Exempt   Tax     Tax     Tax      Tax      Tax
    Yield   Rate    Rate    Rate     Rate     Rate
    4%      4.71%   5.33%   5.56%   5.97%    6.15%
    5%      5.88%   6.67%   6.94%   7.46%    7.69%
    6%      7.06%   8.00%   8.33%   8.96%    9.23%
    7%      8.24%   9.33%   9.72%   10.45%   10.77%
What is the Yield or Rate of Return on a
         Financial Investment?

                   1
                       
     100  20  9  
1              1  100
       20         
                      

    =19.58%
Bond Price Calculation

   Assume that a bond has a price quote of 84. The
   actual price for the bond is $840, as calculated below:

   Bond price = Face value (usually $1,000) x bond quote
              = $1,000 x 84 percent
              = $1,000 x .84
              = $840
                                              Bond Ratings




A plus sign (“+”) following a rating indicates that it is likely to be upgraded, while a minus sign (“-“) following a rating indicates
                                                 that it is likely to be downgraded.
                                             ., REVIEW BOOK: Personal Finance. Retrieved Oct 1, 2009 from http://www.flatworldknowledge.com/node/50890   .
Considerations Before Investing in
Bonds
   Susceptibility to certain risks

     Credit
     Callability

     Inflation

     Interest rate
Considerations Before Investing in
Bonds
   Premiums and discounts

   Current yield

   Yield to maturity

   Tax-equivalent yields

   When to sell
Bond Prices, Bond Yields, and Interest
               Rates




          ., REVIEW BOOK: Personal Finance. Retrieved Oct 1, 2009 from http://www.flatworldknowledge.com/node/50890   .
Yield to Maturity
Effective Yield of a Tax-Free
Investment
 Not paying tax effectively increases your rate of
  return
    you get to keep all of your profits, instead of only
     a portion

                r       
        1  taxbracket 100
                        
 Example: 28% tax bracket, 5% rate of return
         .05 
         1  .28 100
                  
= 6.94%
Advantages of Investing in Bonds
   Pay higher interest rates than savings

   Offer safe return of principle

   Have less volatility than stocks

   Offer regular income

   Require smaller initial investment
Disadvantages of Investing in Bonds
   No hedge against inflation

   Can be quite volatile

   Compounding is almost impossible

   Subject to investors tax rate

   Poor marketability
Bond Characteristics and Risk




       ., REVIEW BOOK: Personal Finance. Retrieved Oct 1, 2009 from http://www.flatworldknowledge.com/node/50890   .

								
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