© 2013 pearson education, inc. all rights reserved.14-1 chapter 14 investing in bonds and other...
TRANSCRIPT
![Page 1: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/1.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-1
Chapter 14
Investing in Bonds and Other
Alternatives
![Page 2: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/2.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-2
Introduction
• Bonds carry less risk than stocks.
• Bonds provide steady income.
• But returns from bonds are not necessarily low.
![Page 3: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/3.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-3
Why Consider Bonds?
• Bonds reduce risk through diversification.
• Bonds produce steady income.
• Bonds can be a safe investment if held to maturity.
![Page 4: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/4.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-4
Basic Bond Terminologyand Features
• Par value
• Maturity
• Coupon Interest Rate
• Indenture
![Page 5: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/5.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-5
Treasury and Agency Bonds
• Risk-free
• Not callable
• Lower interest rate
• Most interest payments are exempt from state and local taxes.
![Page 6: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/6.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-6
Treasury and Agency Bonds
• Treasury-issued debt has maturities from 3 months to 10 years.
• Bills, notes, and bonds differ by maturity and denomination.
• Agency bonds
![Page 7: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/7.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-7
Treasury and Agency Bonds
• Pass-through certificates issued by the Government National Mortgage Association “Ginnie Mae”
• Treasury Inflation Protected Securities (TIPS)—par value changes with the consumer price index to guarantee investor a real rate of return
![Page 8: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/8.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-8
Municipal Bonds
• “Munis”—issued by states, counties, cities, public agencies e.g. school districts
• General obligation bond
• Revenue Bonds
• Serial maturities
![Page 9: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/9.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-9
Special Situation Bonds
• Zero Coupon Bonds—don’t pay interest and are sold at a deep discount from their par value
• Junk Bonds—also high-yield bonds, very risk, low-rated BB or below
![Page 10: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/10.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-10
Bond Ratings – A Measureof Riskiness
• Moody’s and Standard & Poor’s provide ratings on corporate and municipal bonds.
• Ratings involve a judgment about a bond’s future risk potential.
• The poorer the rating, the higher the rate of return demanded by investors.
• Safest bonds receive AAA, D is extremely risky.
![Page 11: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/11.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-11
Table 14.1 Interpreting Bond Ratings
![Page 12: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/12.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-12
Bond Yield
• Current Yield—ratio of annual interest payment to the bond’s market price
• Yield to maturity—true yield or return that the bondholder receives if a bond is held to maturity—measure of expected return
• Equivalent taxable yield on municipal bonds
![Page 13: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/13.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-13
Bond Valuation
• The value of a bond is the present value of the interest payments plus the present value of the repayment of the bond’s par value at maturity.
![Page 14: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/14.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-14
Bond Valuation
• If the issuer becomes riskier, the required rate of return should rise.
• A change in general interest rates, the required rate of return should increase.
• When interest rates rise, the value of outstanding bonds falls.
![Page 15: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/15.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-15
Why Bonds Fluctuate in Value
• Inverse relationship between interest rates and bond values in the secondary market.
• When interest rates rise, bond values drop, and when interest rates drop, bond values rise.
• Longer-term bonds fluctuate in price more than shorter-term bonds.
![Page 16: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/16.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-16
Why Bonds Fluctuate in Value
• As a bond approaches maturity, the market value approaches its par value.
• When interest rates go down, bond prices go up, but upward price movement on bonds with a call provision is limited by the call price.
![Page 17: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/17.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-17
Figure 14.3 The Price Path of a 12 Percent Coupon Bond over Its Life
![Page 18: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/18.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-18
What Bond Valuation Relationships Mean to the Investor
• If you expect interest rates to go up (bond prices to fall)—purchase very short-term bonds.
• If you expect interest rates to go down (bond prices to rise)—purchase bonds with long maturities and are not callable.
![Page 19: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/19.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-19
Figure 14.4 How to Read Online Corporate Bond Listings
![Page 20: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/20.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-20
Preferred Stock—An Alternative to Bonds
• A hybrid security with features of common stock and bonds.
• Similar to common stock—no fixed maturity date, not paying dividends won’t bring bankruptcy.
• Similar to bonds—dividends are fixed, paid before common and no voting rights.
![Page 21: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/21.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-21
Investing in Real Estate
• Requires time, energy, and sophistication
• Direct investments in real estate
• Indirect investments in real estate
• Investing in real estate: the bottom line
![Page 22: © 2013 Pearson Education, Inc. All rights reserved.14-1 Chapter 14 Investing in Bonds and Other Alternatives](https://reader031.vdocument.in/reader031/viewer/2022020417/56649f125503460f94c25b25/html5/thumbnails/22.jpg)
© 2013 Pearson Education, Inc. All rights reserved. 14-22
Investing – Speculating in Gold, Silver, Gems, and Collectibles
• Don’t do it!
• This is not investing—it is speculation.
• Collectibles may only have entertainment value.
• Don’t expect them to provide for your financial future.