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An Introduction To Bonds: Tina Horvath

This document provides an introduction to bonds. It defines a bond as a debt instrument where an organization borrows money from an investor. The organization agrees to repay the principal at maturity and make regular interest payments. There are different types of bonds including corporate bonds issued by companies, government bonds backed by governments, and municipal bonds issued by state and local governments. The document outlines the key components and risks of different bond types. It also discusses factors that influence bond prices such as interest rates, inflation, and liquidity.

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76 views9 pages

An Introduction To Bonds: Tina Horvath

This document provides an introduction to bonds. It defines a bond as a debt instrument where an organization borrows money from an investor. The organization agrees to repay the principal at maturity and make regular interest payments. There are different types of bonds including corporate bonds issued by companies, government bonds backed by governments, and municipal bonds issued by state and local governments. The document outlines the key components and risks of different bond types. It also discusses factors that influence bond prices such as interest rates, inflation, and liquidity.

Uploaded by

Sanjay Bindra
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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An Introduction to Bonds

Tina Horvath
What is a Bond?
 Debt instrument: When one purchases a bond, one essentially lends an
organization such as the government or a corporation a specified
amount of money which the borrower agrees to repay at a designated
time.
 Why buy a bond?
• In exchange for permission to borrow money from the lender, the
organization agrees to pay annual interest payments on the amount
borrowed.
 Components:
• principal - face value of the bond (typically $1000)
• coupon - rate of interest
• maturity - time till issuer will repay borrower
Different Types of Bonds
 Corporate
 Government (Treasury)
 Municipal
Corporate Bonds
 Corporate bonds are issued so that companies can finance expansion
or raise funds for other expenses.
 Senior debt - bonds that are backed by specific assets of the company.
 Debenture - a bond whose issue is secured simply by the promise of
the company to repay the amount borrowed.
 Default Risk (Ratings)
• Standard & Poor: AAA = good credit, CCC = poor standing
• Moody: Aaa = good credit, Caa = poor standing
 Special cases:
• “junk bonds” - bonds with high default rating (CCC, Caa or worse)
• convertible bonds - bonds that can be exchanged for other securities
Government Bonds
 Government, or Treasury bonds, are especially noted for their lack of risk since they
are backed by the US government.
• bill - maturity of a year or less
• note - maturity of 1-10 years
• bond - maturity of 10+ years
 STRIPS - Separate Trading Registered Interest and Principal Securities, or STRIPS,
can be split up into separate interest and principal payments, with each payment
trading as a separate security. Example: zero coupon bonds
 The Federal Reserve retains some control over the bond market by
• open-market operations: buying or selling US Treasuries in order to control the money
supply
• changing the discount rate: raising or lowering the rate which in turn raises or lowers
general interest rates
• setting reserve requirements: increasing reserves and thereby raising interest rates or
decreasing reserves and thereby decreasing rates
Municipal Bonds
 Municipal bonds are state and local government bonds.
 Tax free, not subject to federal taxes
 Two types of municipal bonds:
• general obligation bonds - funded by property taxes,
sales taxes, and income tax
• revenue bonds - funded by revenue from a particular
project; e.g., a government issues a revenue bond in
order to build a turnpike and repays these bonds with
the tolls collected.
Yields
 Coupon yield: the interest paid on the principal based on
the coupon rate.
 Current yield: yield based on interest payments with
respect to the purchase price of the bond (discount,
premium).
 Yield to maturity (YTM): estimates the total amount that
one can earn over the total life of the bond.
• YTM = coupon + prorated discount or premium
(face value + purchase price) / 2
What Determines Bond Prices?
 Current market interest rates: Bond prices tend to increase
when interest rates fall and decrease when rates rise.
 Inflation: High inflation will devalue a bond.
 Liquidity: The ease and cost of trading a particular bond
will affect the price.
 Political risk: People tend not to invest when the
government seems unstable.
Bonds in the Real World

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