Fin 101: week 13
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This 3 page Class Notes was uploaded by Rachel Rusnak on Wednesday July 6, 2016. The Class Notes belongs to FIN 101 at Ball State University taught by Professor Boylan in Summer 2015. Since its upload, it has received 19 views. For similar materials see Personal Finance for Fiscal Wellness in Finance at Ball State University.
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Date Created: 07/06/16
Personal Finance 101 Professor Boylan 1 Chapter 13: Investing in Bonds. ***on test*** 1. Creating an Investment Objective. a. The first step in any investment plan is to have an investment objective. Once that is established you can pick investments: i. Desired profit/ return. ii. Amount you can invest. iii. Amount you are willing to lose. iv. Time horizon. v. Tolerance for risk. vi. Where you plan to get help from picking investments. 2. People Will Invest in Anything They Think Will Raise the Price. a. What makes a good investment? i. Limited supply (availability). ii. Increased demand. b. What makes a bad investment? i. Increased supple (availability). ii. Decreased demand. 3. BIG Similarity. Good Company Good Investment 4. Different Ways to Invest. a. Common stock (equities). b. Bonds (liabilities). c. Preferred stock and convertibles (equities). d. Mutual funds (assets) and e. Exchange traded fund (stock). f. Real estate (assets). g. Cash (assets). h. Art (assets). i. Annuity (assets). 5. Different Ways to Invest. a. Bonds. i. Represent debt. ii. Provide current income. iii. Lower level of risk than stock, with lower expected returns. iv. Bond values inversely related to in prevailing interest rates. 6. Why Are Bonds Important? a. Huge size x4 the size of NYSE, Euronext, and American Stock Exchange combined. b. Your mortgage will probably be in the $100,000 x 100,000 homes = A LOT of $$$$. 7. Types of Bonds. a. Governmental. i. Federal (deficit spending). ii. State (roads, parks, healthcare, companies) iii. Local (cities, parks, public schools, utilities). b. Corporate. i. Banks (aiming to diversify). ii. Corporations looking for cash to build or expand. c. Private placement. 8. Basics of Investing in Bonds. a. Fixed income security. Personal Finance 101 Professor Boylan 2 b. Interest rates and bond prices move in opposite directions. c. Versatile. d. Preservation and long-term accumulation of capital. e. Lower risk and return than stock. 9. What Law Governs Bonds? a. Tort (Civil). b. Criminal. c. Contract. d. Religious. e. International. f. Why is this law important? i. Don’t want a company to go into “civil” law. 10. Bond Credit Ratings. a. Understanding credit ratings. i. Investment grade- highest. ii. Upper- medium grade. iii. Junk- potential for default. 11. Bond Market- Time Frames. a. Corporate bonds. i. 20, 40 year maturities. b. Mortgage bonds. i. 15, 30 year maturities. 12. Types of Bonds. a. U.S Treasury Bonds. i. Treasury bonds. ii. Treasury notes. b. TIPS: Treasury Inflation Protected Securities. c. I Bonds. i. Treasury bills. d. U.S. Agency Bonds. e. Municipal Bonds. i. Revenue bonds. ii. General obligation bonds. f. Corporate Bonds. i. Convertible bonds. g. Zero Coupon Bonds. h. Junk Bonds. 13. The Bond Market. a. Convertible bonds. i. Debenture that may be converted into a certain number of shares of company’s common stock. ii. Conversion: 1. Privilege. 2. Ratio. 3. Value. 4. Premiums. 14. Bond Issue Characteristics. a. Par value= $1,000. b. Like a loan= bondholder lends money to issuer. c. Interest- usually paid every 6 months. d. Coupon- annual interest rate paid by issuer. e. Maturity rate- when loan ends. f. Collateral. i. Senior or secured bonds- backed by a legal claim on specific property. Personal Finance 101 Professor Boylan 3 1. Liquidated to pain bondholders if issuer defaults. 2. Mortgage bonds, equipment trust certificates. ii. Junior or unsecured bonds- back issuer’s promise. 1. Debentures. g. Sinking funds. i. Annual repayment schedule detailing used to pay off the issue. h. Call feature. i. Bond provisions must state if bond can be called prior to maturity. 1. Conditions. 2. Freely callable. 3. Deferred call. 15. Are Bonds Risky? Premium Par. Discount 5% 10% 20% Value= ? (2,000) $1,000.00 ? (500) Interest= ? (100) $100.00 ? (100) 16. Private Placement. a. Bond manager is VERY important. b. Place that cannot get financing. c. Very high interest rates. 17. How to Pick Good Bonds? a. Identify if the bond will be around for a good time. b. Understand who the bond is with (or who is obligated to pay (it may not be who you think)). c. What is the “yield to maturity”. 18. The Rule of 72. a. Great way to estimate how your investment will grow over time. 72 10 years 7 (Approximate time to double your money.) 72 6% rate of return. 12 (should double your money.)
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