Section 2 – Bonds and Other Financial Assets. Objectives Describe the characteristics of bonds as financial assets. Identify different types of bonds.

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