Buying and Selling Bonds Lesson 13 2 You

Buying and Selling Bonds Lesson 13. 2

�You can buy savings bonds and Treasury securities through the FED �The FED will mail you an application and you will send your check or money order back with your application �The FED uses a system called Treasury Direct to record and store data about Treasury securities and their owners Purchasing bonds through the Federal Reserve

�Securities can be bought online through Treasury Direct at www. treasurydirect. gov �Interest (and principal when bond matures) earned is deposited directly into your account �With Treasury Direct, you can reinvest into new securities after old ones mature Treasury Direct System

�U. S. government securities may also be bought through banks or brokers but you will pay a commission �Both Full-service and discount brokers can assist you in purchasing bonds. But, you will receive not advice in your decision to buy or sell Buying bonds through commercial banks and brokers

�You can set up a bank account for purpose of buying and selling municipal bonds. �Note: Most banks buy large blocks of municipal bonds and make them available to their customers and there is a fee for this service although it may be incorporated into the price of the bond Purchasing municipal bonds through banks and brokers

�Some employers will withhold money from your paycheck and when your withholdings are sufficient, the savings bond will be purchased and sent to you. �Note: This process takes longer because your employer will process the money through a bank which in turn purchases the bond. Buying bonds through payroll deductions

�Most bond options require a minimum investment of $1, 000. Only savings bonds can be purchased with small, regular payments. �

Bondholders earn interest each day they hold the bond Bondholders redeem bonds at face value at maturity Bondholders can sell their bond before maturity at a price higher than they paid for it as bonds often appreciate in value 3 ways bond investors earn $

�They have a fixed interest rate �They represent a loan that the issuer must repay �Bonds prices tend to remain steadier than do stock prices �Bonds prices tend to react in the opposite direction of stock prices and therefore offset risk of stocks in one’s portfolio What makes bonds a safe investment?

�Bonds are not insured, investors can loose their money if the related corporation or municipality defaults. What risk in associated with bonds?

Independent Rating services: �Moody’s (www. moodys. com) Highest Rating: AAA �Standard Lowest Rating: D (bond is in default) & Poor’s (www. standardandpoors. com) Who rates bond’s risk level?

Investment grade bond has a rating of: �Baa or higher for Moody’s �BBB or higher in S& P’s Note: Unfortunately, the higher the bond’s rating, the lower the interest rate you will earn Lower case letters in ratings indicate more risk than capital letters Facts about Bond Rating

�A junk bond is a bond that has a low rating or not rating at all. �Any bond with a rating of Ba /BB or lower is called a junk bond �Junk bonds have higher yields but also can have reasonable level of risk. �Don’t buy junk bonds if you can’t afford to loose your investment What is a Junk Bond

�a – senior bond �b – split bond �c – zero coupon bond �d – unsecured bond �E – secured bond �C – Junk Bond Rating Types

READING CORPORATE BOND LISTINGS SEE PAGE 316 Name of the bond Type/Rating Type of bond/it’s Rating Coup Fixed Interest Rate (the coupon rate) Mat The Maturity Date 3 p. m. Bid Final closing bid for the day Net Chg Compares 3 p. m. bid with previous day Yld The current yield for the bond (coupon rate divided by average market value)

�Only factor that has a real effect on bonds: INTEREST RATES �When interest rates rise value of bonds Why? The bonds are paying less in comparison to other fixed-rate investments. Conversely, when interest rates drop, fixed-rate bonds will become attractive because they are “locked-in” at higher rates. MORE FACTS ABOUT BONDS