Bonds and Financial Instruments in the Market
Chapter 11:
Financial Markets
Section 4:
Bonds & Other
Financial Instruments
pgs.338-343
Key Concepts
•
A bond is a contract by a
corporation or the
government promising to
repay borrowed money, plus
interest, on a fixed schedule.
•
The amount that the bond
issuer promises to pay the
buyer at maturity is its
par
value
.
•
Maturity
is the date the bond
is due to be repaid.
•
The
coupon rate
is the interest
rate a bondholder receives
every year until a bond
matures.
•
The
yield
is the annual rate of
return.
Why Buy Bonds?
•
There are two reasons to
invest in bonds—the
interest paid on bonds and
the gains made by selling
bonds.
•
Most people buy bonds for
the interest.
•
Generally, bonds are
considered less risky than
stocks b/c bondholders are
paid before stockholders.
•
Generally speaking, bonds
with longer maturity dates
have higher yields than
shorter dates, b/c they are
seen as having higher risk.
Types of Bonds—
U.S. Government Securities
•
Bonds are classified on who
issues the bonds.
•
The U.S. Government issues
securities called Treasury
bonds, notes, or bills.
•
Treasury bonds help keep the
federal government operating.
•
Treasury bonds have the
longest maturity (more than
ten years) and Treasury bills
having the shortest (one year
or less).
•
They are backed with the “full
faith and credit” of the federal
government they are
considered risk free.
Types of Bonds—
Municipal Bonds
•
Bonds issued by the state
and local governments are
called municipal bonds.
•
Funds raised by these bonds
finance government
projects such as
construction of roads,
bridges, school and other
public facilities.
•
The interest earned on
these bonds is tax free.
•
These are usually seen as
risk free but there have
been states and cities that
went bankrupt .
Types of Bonds—
Corporate Bonds
•
These bonds help
businesses expand.
•
These bonds generally
pay a higher coupon rate
than government bonds
b/c the risk is higher.
•
One kind of corporate
bond, a
junk bond
, is
considered high risk but
has the potential for high
yields.
•
The risk involved with
investing in junk bonds is
similar to that of investing
in stocks.
Buying Bonds
•
Most investors purchase
bonds b/c they want the
guaranteed interest income.
•
Investors who want to sell
bonds before they reach
maturity study the bond
market to see if they can
sell their investment at a
profit.
•
The main risk that bond
buyers face is that the
issuer will default.
•
This is why Moody’s and
Standard & Poor’s and
others rate the bonds from
AAA to junk status.
Other Financial Instruments
•
We have already talked about
Certificates of Deposit
(CDs). You
have to leave your money in the
account 6 months to 5 years and
then you get much better interest
rates.
•
Another investment is
Money
Market Mutual Funds
, which
allow investors to own a variety
of short-term financial assets,
such as Treasury bills, municipal
bonds, large-denomination CDs,
and corporate bonds. These
mutual funds yield higher than
bank accounts, but provide a
similar level of liquidity. There is
less risk than a CD b/c the money
is not committed for a specified
length of time.
Bonds are financial instruments issued by corporations or governments to borrow money from investors. They promise to repay the borrowed amount with interest on a fixed schedule. Different types of bonds include U.S. Government Securities, Municipal Bonds, and Corporate Bonds, each carrying varying levels of risk and returns. Investors buy bonds for interest income and the potential gains from selling them. Bonds play a crucial role in financial markets, offering stability and diversification to investment portfolios.
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Presentation Transcript
Chapter 11: Financial Markets Section 4: Bonds & Other Financial Instruments pgs.338-343
Key Concepts https://upload.wikimedia.org/wikipedia/commons/e/e8/San_Francisco_Pacific_Railroad_Bond_WPRR_1865.jpg A bond is a contract by a corporation or the government promising to repay borrowed money, plus interest, on a fixed schedule. The amount that the bond issuer promises to pay the buyer at maturity is its par value. Maturity is the date the bond is due to be repaid. The coupon rate is the interest rate a bondholder receives every year until a bond matures. The yield is the annual rate of return.
Why Buy Bonds? http://images.slideplayer.com/16/5104187/slides/slide_6.jpg There are two reasons to invest in bonds the interest paid on bonds and the gains made by selling bonds. Most people buy bonds for the interest. Generally, bonds are considered less risky than stocks b/c bondholders are paid before stockholders. Generally speaking, bonds with longer maturity dates have higher yields than shorter dates, b/c they are seen as having higher risk.
Types of Bonds U.S. Government Securities http://g.foolcdn.com/editorial/images/102672/bond_large.jpg Bonds are classified on who issues the bonds. The U.S. Government issues securities called Treasury bonds, notes, or bills. Treasury bonds help keep the federal government operating. Treasury bonds have the longest maturity (more than ten years) and Treasury bills having the shortest (one year or less). They are backed with the full faith and credit of the federal government they are considered risk free.
Types of Bonds Municipal Bonds http://survivingcalifornia.files.wordpress.com/2010/07/muni-bond-san-fran.jpg Bonds issued by the state and local governments are called municipal bonds. Funds raised by these bonds finance government projects such as construction of roads, bridges, school and other public facilities. The interest earned on these bonds is tax free. These are usually seen as risk free but there have been states and cities that went bankrupt .
Types of Bonds Corporate Bonds These bonds help businesses expand. These bonds generally pay a higher coupon rate than government bonds b/c the risk is higher. One kind of corporate bond, a junk bond, is considered high risk but has the potential for high yields. The risk involved with investing in junk bonds is similar to that of investing in stocks. http://images.bidnessetc.com/img/ab9ebd57177b5106ad7879f0896685d4-will-the-junkbond-market-bubble-burst.jpg
Buying Bonds http://illinoisreview.typepad.com/.a/6a00d834515c5469e201a3fccdcef3970b-pi Most investors purchase bonds b/c they want the guaranteed interest income. Investors who want to sell bonds before they reach maturity study the bond market to see if they can sell their investment at a profit. The main risk that bond buyers face is that the issuer will default. This is why Moody s and Standard & Poor s and others rate the bonds from AAA to junk status.
Other Financial Instruments http://moneyep.com/wp-content/uploads/2010/01/Mutual-fund-300x275.jpg We have already talked about Certificates of Deposit (CDs). You have to leave your money in the account 6 months to 5 years and then you get much better interest rates. Another investment is Money Market Mutual Funds, which allow investors to own a variety of short-term financial assets, such as Treasury bills, municipal bonds, large-denomination CDs, and corporate bonds. These mutual funds yield higher than bank accounts, but provide a similar level of liquidity. There is less risk than a CD b/c the money is not committed for a specified length of time.
