BONDS AND OTHER FINANCIAL ASSETS

Chapter 11 Section 2

BONDS AS FINANCIAL ASSETS

Bonds are one of the most important ways for a borrower to raise money

Bonds are basically IOUs that represent debt that the government or a company must repay to an investor

Typically pay the investor a fixed amount of interest at regular intervals for a fixed amount of time

3 COMPONENTS OF BONDS

1. Coupon rate- interest rate that will be paid to the bondholder

2. Maturity- the time at which the payment is due

3. Par value- also called face value or principal, the amount the investor pays to purchase the bond and that will be repaid to the investor

*not all bonds are held to maturity, some are bought and sold. Yield comes into play- annual rate of return on the bond if held to maturity

BUYING BONDS AT DISCOUNT

Investors can purchase bonds at lower than par value

They will still earn interest and the par value The reason this is possible is because interest rates change over time

BOND RATINGS

2 firms publish bond ratings- Standard & Poor’s and Moody’s

Bonds are rated on a number of factors, including the issuer’s ability to make future interest payments and repay the principal upon maturity

The ratings go from AAA/Aaa (highest) to D (lowest) The higher the rating for a company, the lower the interest rate they usually pay to get investors

Also the higher the rating, the higher the bond will sell

TYPES OF BONDS

Savings bonds- low denomination bonds issued by the government, they don’t pay interest rates at intervals but instead sell bonds for cheaper and upon maturity you receive more

Treasury bonds, bills, and notes- offer different lengths of maturity (bond is long term and bill is short term), backed by the US government, among safest investments

Municipal bonds- state and local governments issue bonds to help finance government projects, safe investments, and are tax exempt

TYPES OF BONDS (CONTINUED)

Corporate bonds- issued by companies to help company grow. Fairly large denominations and taxed as ordinary income. Moderate level of risk. Watched by S&P’s and Moody’s and the SEC

Junk bonds- high-yield securities. Lower ratings but higher-paying. Higher risk of investment

OTHER TYPES F FINANCIAL ASSETS

Certificates of deposit- purchased through banks, they will lend out the money for a certain amount of time before repaying saver their original amount plus a small interest

Money Market Mutual Funds- similar to Mutual funds but intermediaries buy short-term financial assets, investors receive higher interest rates, not covered by FDIC

FINANCIAL ASSET MARKETS

Capital markets- markets in which money is lent for periods longer than a year. Long-term CDs and corporate and government bonds that require long maturation periods are traded

Money markets- markets in which money is lent for periods less than a year. Short-term CDs, Treasury bills, and money market mutual funds are traded

Primary markets- financial assets can only be redeemed by the original holder

Secondary markets- financial assets that can be resold