COA 4131 1st Edition Lecture 26 Outline of Last Lecture I II III IV V VI VII VIII Stock Reports in the Newspaper Financial Section Stock Market Indicators Four Numerical Measures Three Investment Theories Buying and Selling Stocks The Language of Buying and Selling Advice on Your First Stock People you Can Trade From Outline of Current Lecture I Bonds and Bondholders II The Role of Bonds in Investment Plan III Definition and Explanations of Corporate Bonds IV Government Bonds V Bond Ratings VI What s Best for Inflation Protection Current Lecture A Review of Stocks a Some companies are called Super Brands i Market leader ii They are running things iii Marriot Hotels 1 World s leader in hotels 2 70 countries are in it 3 Have many sub brands under it 4 Main competitor is Hilton 5 Started by Mormon s a The side table has a book of Mormon s in it not the Bible 6 Alliance with Ritz Carlton a Nice upper scale hotel b Acquisition b When economy goes up number of pets being bought increases as well B Bonds and Bondholders a Bondholders i A lot of people have U S savings bonds ii Type of savings account in its own way iii Government and corporate 1 Two types of bonds iv Interest payments 1 Usually receive them twice a year 2 April 11 and October 11 v Principle back 1 When it matures 20 30 years you get it all back vi Can t vote on policy C The Role of Bonds in Investment Plan a Investing in bonds i How much and why 1 When interest rates go up bond prices go down a They fluctuate 2 When economy is down usually a good time to buy bonds a Good interest rates 3 Pay you more 4 Don t perform as well as stock but more safe than stocks in the long run 5 Long term investments a Won t get much payback if you go in and out fast takes time 6 Slow but secure money b Rate of return i Coupon rate 1 Means the bond ii Market value 1 How much it is worth 2 The price determined by the net assets the deal percentage rate interest rate and what they think about current and future earnings c Determining market value i Calculations ii Before its bought figure out how much its worth iii 7 5 is a good deal d Yield and yield calculations i Yield 1 Rate of return 2 Determined by annual income and current market value ii Maturity rate 1 In 20 or 30 years how much it will be worth 2 Want it to grow 3 Figure out when you will retire iii Liquidity 1 How soon can you turn it into cash 2 Not very fast 3 Can sell it any time you want a Won t get payments back iv Coupon rate 1 Interest rate 2 Longer you keep it in the better interest rate you ll get D Definition and Explanations of Corporate Bonds a Corporate Bonds b Types of Corporate Bonds i Debenture 1 Agreement ii Secured bonds 1 Backed by banks some way 2 Backed by financials in some way 3 Lower interest rate than unsecured iii Subordinated debentures 1 Unsecured 2 Taking some chance a As company goes under bond holders are paid first 3 Most common iv Convertible bonds 1 Sometimes they might switch it into stock 2 Has the be the right amount of stock a Has to make sense v Callable bonds 1 Even better 2 Bond with government or company and they want it back a Will give you so much money back b Usually a good deal 3 Sign that a company is doing really well a If they have 2 5 million to pay back to everyone they are doing well b If they buy their own stock that s a good sign too vi How investors purchase corporate bonds 1 Spread a Different buying selling 2 Account executives the company themselves don t usually sell straight through banks 3 Will pay a fee with corporations won t pay a fee with government bonds vii Reasons for purchasing Corporate bonds 1 Interest income a Registered bonds i To a person b Zero coupon bonds i More volatile tax sheltered held for a long time ii Sold at deep discount value iii If cost 1 000 it will be offered at 800 c Potential capital gains d For the bond repayment at maturity i Can get rid of it if you need the money viii Tax consequences of corporate bonds 1 Tax rate drops E Government Bonds a Types of government bonds i Treasury bills ii Agency bonds 1 Fannie Mae iii Municipal bonds b Federal i Tender forms 1 Application ii Treasury bills 1 Minimum of 1 000 iii Treasury notes 1 1 000 to 1 million iv Treasury bonds 1 Maturation c State and Local Government securities i Municipal bonds 1 Used to finance new construction schools roads ect a Good if in highly populated locations 2 Munis 3 Exempt from taxes usually 4 Cities local state d Tax consequences of government bonds i Note there are no more HH 1 EE bonds and I bonds no more HH 2 Can t buy HH ones anymore ii Tax credit or better deal if you purchase in your own location 1 In your state F Bond Ratings a Moody s and Standard and Poor s i AA s and AAA 1 AAA is better than AA s ii Default 1 Failure of debtor iii Investment grade b Junk bonds and junk bond funds i Junk bonds 1 Also referred to as high yield bonds 2 Have low rating 3 Take more risks 4 Purchase at beginning of investing when you have a little more money 5 Can t assume if it s a good or bad company c High Yield Bonds i High risk ii Purchase at beginning of investing d Reading the bond section i WSJ and Barrons ii Quoted prices e Bonds as part of an investment strategy f Laddering i Different times during the year and over the course of many years that things will be coming into you G What s Best for Inflation Protection a I Bonds i Offer a distinct tax advantage if you are spending no more than 10 000 b TIPS i Treasury Inflation Protected Securities
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