Personal finance 6th madura chapter 16 investing in bonds

All Rights ReservedChapter Objectives 1 of 2 16.2 Identify the different types of bonds 16.3 Identify factors that affect the return yield from investing in a bond 16.4 Describe how bond

Trang 2

Chapter Objectives (1 of 2)

16.2 Identify the different types of bonds

16.3 Identify factors that affect the return (yield) from investing in a bond

16.4 Describe how bonds are valued

16.5 Discuss why some bonds are risky

Trang 3

Chapter Objectives (2 of 2)

16.7 Explain how investing in bonds can fit within your financial plan

Trang 4

Background on Bonds (1 of 5)

government agencies or corporations

amount returned to the investor at the maturity

date when a bond is due

Trang 5

repay par value

– Call feature: a feature on a bond that allows the issuer

to repurchase the bond from the investor before maturity

 These bonds offer a slightly higher return

Trang 6

– Convertible bond: a bond that can be converted into a

stated number of shares of the issuer’s stock if the stock price reaches a specified price

 These bonds tend to offer a slightly lower return

Trang 7

on a bond if it is held to maturity

– If a bond sells at par value, its yield to maturity equals

the coupon rate

– If a bond sells below par value, its yield to maturity

would exceed the coupon rate

– If a bond sells above par value, its yield to maturity

would be less than the coupon rate

Trang 8

Financial Planning Online (1 of 3)

to the section on bond calculators

maturity of your bond based on its present price, its coupon rate, and its maturity

Trang 9

– Investors sell their bonds to other investors before they

reach maturity

– Bond prices change in response to interest rates

– Brokerage firms also take orders to buy or sell bonds

Trang 10

Types of Bonds (1 of 4)

by the U.S Treasury

– Interest is subject to federal income tax, but exempt

from state and local taxes

– Can easily be sold in the secondary market

Trang 11

by state and local government agencies

– Low risk

– Interest exempt from federal income tax

issued by federal agencies

– Low default risk

– Interest is taxable

Trang 12

www.bloomberg.com

by municipal bonds with various terms to maturity Review this information when considering

purchasing municipal bonds

Trang 13

by large firms

– Subject to default risk

– High-yield (junk) bonds: bonds issued by smaller, less

stable corporations that are subject to a higher degree

of default risk

Trang 14

Trang 15

Exhibit 16.1 An Example of Corporate Bond Quotations

EXHIBIT 16.1 An Example of Corporate Bond Quotations

Company Coupon Maturity Price Yield Estimated Volume (in $1,000s)

Zugle Co 5.00% Dec 1, 2018 100.00 5.00% 4,000

Trang 16

Return from Investing in Bonds (1 of 3)

returns

– If interest rates rise, the value of your bond decreases– If interest rates fall, the value of your bond increases

Trang 17

– Interest is taxed as ordinary income (unless tax

exempt)

– Selling bonds at a price higher than you paid also

results in a capital gain

Trang 18

EXHIBIT 16.2 Potential Tax Implications from Investing in Bonds

2 You sell the bonds after two years at

a

price of $10,200.

You receive coupon payments (taxed at your ordinary income tax rate) of $800 in the first year and in the second year You also earn a long-term capital gain of $500 in the second year, which is subject to the long-term capital gains tax for that year.

3 You sell the bonds after two years at

a

price of $9,500.

You receive coupon payments (taxed at your ordinary income tax rate) of $800 in the first year and in the second year You also incur a long-term capital loss of $200 in the second year.

4 You hold the bonds until maturity You receive coupon payments (taxed at your ordinary income

tax rate) each year over the 10-year life of the bond You also receive the bond’s principal of $10,000 at the end of the 10- year period This reflects a long-term capital gain of $300, which is subject to the long-term capital gains tax for that year.

Trang 19

Valuing a Bond

– Present value of the future coupon payments

– Present value of the principal payment

– Higher rate of return is only realized if firms are healthy

enough to make payments

– This may not be true in unfavorable economic

conditions

Trang 20

www.bloomberg.com

financial news related to the bond market, which you may consider before selling or buying bonds

Trang 21

Risk from Investing in Bonds (1 of 4)

repay the creditors

– Risk premium: the extra yield required by investors to

compensate for the risk of default

– Use of risk ratings to measure the default risk

 Ratings reflect likelihood that issuers will repay their debt over time

 Moody’s Investors Service, or Standard & Poor’s are two common bond rating agencies

Trang 22

– Impact of the financial crisis on default risk

 Many firms experienced financial problems and were unable to make bond payments

– Relationship of risk rating to risk premium

 The lower the risk rating, the higher the risk premium offered

on a bond

 Higher risk of default when economic conditions are weak

Trang 23

Exhibit 16.3 Bond Rating Classes

EXHIBIT 16.3 Bond Rating Classes

Trang 24

bond will be redeemed by the issuer

decline in response to an increase in interest rates

– Impact of a bond’s maturity on its interest rate risk

 Bonds with longer terms more sensitive to interest rate movements

Trang 25

– Selecting an appropriate bond maturity

 Choose maturities that reflect your expectations of future interest rates

 Consider investing in bonds that have a maturity that matches the time you will need the funds

Trang 26

Bond Investment Strategies (1 of 2)

investment based on interest rate expectations

– Purchase long-term bonds if you expect interest rates

to fall

of bonds that are held for a long period of time

Trang 27

Bond Investment Strategies (2 of 2)

will generate payments to match future expenses

– For example, parents might invest in a bond that will

mature at the right time to pay for their child’s college education

Trang 28

How Bond Decisions Fit within Your

Financial Plan (1 of 3)

are:

– What strategy should you use for investing in bonds?

Trang 29

EXHIBIT 16.4 How Bonds Fit Within Stephanie Spratt’s Financial Plan

GOALS FOR INVESTING IN BONDS

1 Determine if I could benefit from investing in bonds.

2 If I decide to invest in bonds, determine what strategy to use to invest in bonds.

ANALYSIS

Strategy to Invest in Bonds Opinion

Interest rate strategy I cannot forecast the direction of interest rates (even experts are

commonly wrong on their interest rate forecasts), so this strategy could backfire This strategy would also complicate my tax return.

Passive strategy May be appropriate for me in many situations, and the low transaction

costs are appealing.

Maturity matching strategy Not applicable to my situation, since I am not trying to match coupon

payments to future expenses.

Trang 30

EXHIBIT 16.4 How Bonds Fit Within Stephanie Spratt’s Financial Plan

DECISIONS

Decision on Whether to Invest in Bonds:

I cannot afford to buy bonds right now, but I will consider purchasing them in the future when my financial position improves Bonds can

generate a decent return, and some bonds are free from default risk I find Treasury or AAA-rated bonds to be most attractive.

Decision on the Strategy to Use for Investing in Bonds:

I am not attempting to match coupon payments with future anticipated expenses I may consider expected interest rate movements according

to financial experts when I decide which bond fund to invest in, but I will not shift in and out of bond funds frequently to capitalize on expected interest rate movements I will likely use a passive strategy of investing

in bonds and will retain bond investments for a long period of time.

Định dạng
Số trang	30
Dung lượng	163,01 KB