Bonds & Fixed-Income Securities Investment Strategies

Stocks vs. Bond: A Risk Scoreboard

• Stocks represent ownership of companies.• They represent participation in a

company’s growth

• Bonds represent loans made to companies.• Contractual loans made between investors

and institutions

A Closer Look: Bonds

• Form of Debt

• Face value is returned to the investor at maturity.

• Based on company’s ability to generate revenue

A Closer Look: Stocks

• Voice In a Company

• Investments have ambiguous returns

• Return is directly related to rising stock price

Bond vs. Stocks Graph

Bond Rating Agencies

• Rating agencies are private companies that evaluate the bond’s financial health and ability to repay its obligations in a timely manner.

• The major agencies are Moody’s Investor Service, Standard and Poor’s Rating Services, and Fitch IBCA.

• Moody’s rates stocks from Aaa, the highest rating, to D, the lowest.

• Standard and Poor rates from AAA to C.

Classifications

• Investment Grade Bonds: Bonds rated higher than a Baa on Moody’s or a BBB on Standard and Poor’s. They possess the least risk of any available bond. The high rating reflects a company with good financial stability. Due to the low risk the yield (interest) is also lower.

• Intermediate Grade Bonds: Generally bonds with companies in fair condition. They usually have a good degree of security short term but as the bond matures the risk increases. The increase in risks costs the issuer a higher interest rate. The ratings are B, Ba for moody’s and BB for Standard and Poor’s.

Junk Bonds

• Junk Bonds are the lowest rated bonds. They are rated at Caa/CCC or lower. These are the most speculative of bonds and therefore contain the highest risk for even the short term future of a junk bond is unclear. Junk bonds tend to be associated with a company falling apart or one on its way to investment quality. The yields junk bonds pay are high for corporate bonds but at a high risk or no return.

• “Junk Bonds” are most associated with the 1980’s when lots of mergers and acquisitions occurred. To finance those expenses companies would sell junk bonds to the public with very high interest so investors would buy their low-quality bonds.

What is a Mortgage?

• A mortgage is a conveyance of an interest in property as security for the repayment of borrowed money.

• A mortgage loan is a loan to finance the purchase of real estate, usually with specified payment periods and interests rates.

Mortgage Loans

• A mortgagor (borrower) gives the mortgagee (lender) a lien as collateral for the loan.

• A lien is a legal claim against an asset which is used to secure the loan.

• The property is normally real estate- land, houses, buildings, but it could also be large things such as ships or huge machinery

• Loans always come with interest rates and these rates vary on the type of mortgage one gets

Types of Loans

• There are many different types of mortgage loans: conventional, general, first, second, long term, open-end, close-end, ect…

• Most people are familiar with fixed mortgages and they are normally 15 or 30 years in length.

• On 11/28/06 a 30 yr. fixed mtg was at a rate of 5.75% and a 15 yr. was at 5.50%

• The longer you have the lenders money, the higher the interest is going to be.

Mortgage Requirements

• Getting a mortgage depends on:-credit history -income-the lender -purpose -the state -amount loaned

To get a mortgage one must talk to a mortgage broker.

Questions?