Post on 30-Dec-2015
transcript
CHAPTER 11Section 2 – Bonds and Other Financial Assets
Objectives
Describe the characteristics of bonds as financial assets.
Identify different types of bonds. Describe the characteristics of other
types of financial assets. Explain four different types of financial
asset markets.
Bonds
Bonds are certificates sold by a company or government to finance projects or expansion
WWII War Bonds
Fancy IOU’sRepresent debt that gov’t/corporation must repay
to investor
Three Components
1. Coupon RateInterest rate
2. MaturityWhen payment is due (10, 20, 30 yrs)
3. Par ValueFace value or Principal
Buyer=“Holder”, Seller=“Issuer”
Bonds
Yield (Example Page 278)Annual rate of returnNot all bonds are held to maturity
○ Can be bought or sold, price change
Discount from ParEx. Page 278
Bond RatingsTwo Firms That Publish Bond Ratings
Good
Higher Rating could make the bond sell at a higher price and lower interest rate
Issuer’s Point of View
Advantage of selling bonds1. Coupon rate will not go up or down
2. Bondholders do not own part of company like stocks
Disadvantages1. Even in bad years company must make
payments
2. Firm’s bonds may receive low rating and be harder to sell
Types of Bonds Savings Bond
$50-$10,000Virtually no riskGov’t, uses for public works projectsPurchase a $50 Savings Bond for $25, when it
matures get $25 you paid plus $25 interest Treasury Bonds, Bills and Notes
U.S. Treasury DepartmentT-Bills, T-NotesBacked by “full faith and credit” of U.S. Gov’tDiff. Term lengths
Types of Bonds Municipal Bonds
“Muni’s”State and Local Gov’ts use for public improvementsSafe
Corporate BondsModerate riskRely on company’s success
Junk BondsLow Rating, High Risk, Potential for High Yield
International BondsForeign Countries issue bonds
Securities and Exchange Commission
An independent government agency that regulates financial markets and investment Companies. It enforces laws prohibiting fraud and dishonest investment practices.
Other Financial Assets
Certificate of Deposit Money Market Mutual Funds
Not Covered by FDIC insurance, so risky Stock
Financial Asset Markets
Capital MarketsGreater than 1 yrLong-term CD’s, Corporate and Gov’t Bonds
Money MarketsLess than 1 yrShort-term CD’s, T-bills, Money Market
Mutual Funds
Financial Asset Markets
PrimaryNon-transferableSavings Bonds
SecondaryCan be resold without penalty