Chapter One
Bond Basics
What are bonds?
Bonds are investment tools in form of a debt. When the government, corporate bodies, or municipalities want to borrow from the public, they issue bonds. By investing in bonds, you are simply lending your money to the issuer of the bond (government or a corporation) at an interest for a given period of time. Usually bonds have a face value, which is the money being borrowed, the coupon rate which is the interest rate to be paid to the investors and the maturity date, which is the date you get paid the money you invested. Bonds are issued for varying period of time, may be three months, one year or even five years.
When an organization issues a bond, it makes a commitment to you (investor) that it will make regular (quarterly, biannually, or yearly) payment of the interest at a specified rate on the total amount it borrowed from you (face amount) until the maturity date of the bond when it will repay the principal. This simply means that when you invest in bonds you start earning interest regularly until the maturity date of the bond when the issuer of the bond pays back the principle (money borrowed). Because of the facts that you get paid interest regularly and the principle upon the maturity of the bond, this investment instrument is often termed as a fixed income security.
Bonds alongside other investment vehicles such as term deposits and cash are often classified together as income assets because they provide a reliable and
Financial Instruments A financial asset is something which is defined as an entitlement of future cash flows. However, a financial instrument is a broader term used to describe financial assets and other assets in which there are no organised secondary markets to trade them. However, a financial security is something that can be traded in a secondary market. Attributes of Financial Assets Financial assets are those that: • • • • Have a return of yield expressed in terms of percentage. Have risk in which there is probability the actual return will differ from the expected return. Are liquid in that they can be sold at current market prices with reasonable transaction costs. Are expected to have a set time-pattern of cash flows in or out.
The bonds can be issues with fixed interest or variable rate interest, each of which has its advantages and there disadvantages.
Bonds are a debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.
Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:
Debt securities included under this topic include any investment that would be considered a loan to a company, municipality or the government and its agencies. These include corporate or municipal bonds and U.S. Treasury securities and other instruments expressly stated within the codification. Equity securities covered under this section must have an easily attainable market value and include corporate stock, U.S. Treasury securities, and business investments greater than 20%. In this case, the code will dictate the method of accounting to be used as well as financial statement presentation. (GAAP) (FASB ASC 320-10-05-2, 2016).
These bonds are short-term, only 12 months until maturity and pay 12% annually. I haven’t seen all the details on them, but this really might be a good way to increase you’re your total income and at the same time avoid the interest rate risk of intermediate-term and long-term bonds.”
The __________ School Board has recently proposed a bond levy to add new facilities as well as conduct some major repairs to the school. The bond includes building a new gymnasium, a new science room and lab, a new Media Center/Library, new Chapter 1 and Special Education classrooms, and other facilities such as more parking space, an increase in storage area, and new locker rooms. Along with new construction, the board is proposing to remodel facilities such as the drama/music areas, the entire roof, the heating system, the school kitchen, and present gym as well. This bond allowing __________ School to add more facilities should be passed in order for young students to be provided with a better education. Several arguments have been
In return for that money, the issuer provides you with a bond in which it promises to pay a certain rate of interest during the life of the bond, and to repay the face value of the bond (the principle) at its maturity date. Among the types of bonds available for investment are: U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities and foreign government bonds. Zero-interest or coupon municipal bonds are my number one choice because these bonds can be purchased for a small amount, then at its maturity date, or earlier call date these bonds usually pay the face value. Now to me, this is a smart investment choice especially for retirement.
In fact, bond investments are carried out in several ways, depending on the type of bond:
A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,
In the financial markets, the most common forms of marketable securities are stocks and bonds. Though they have some similarities to each other, they differ greatly in many aspects. Broadly speaking, both financial instruments enable one to invest in corporations, public and/or private, with possible profitable returns in the future.
In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, is used.
160-161). Once these options are reviewed then one can make that optimal decision as to what type of investment would be the best options to choose from. Next, is bonds which is a financial instrument, that is issued by a corporation or government entity and is required to be paid back; known as an IOU. These will mature overtime and gain face value, and usually come in all types and varieties to choose from; some taking as long as 100 years to reach it maturity date. Lately, is mutual funds and EFT’s, these are securities that are held in different sectors and eliminate any form of risk compared to other investment; known as the closed-end fund or the open-ended fund. So, what is a “close-end fund, is a fixed amount of dividends in a portfolio of assets; where shares of a closed-end funds can be traded among investors much like stocks” (Kelly & Williams, 2017, pg. 163).
A call provision in a bond issue, the issuer of the bond principal plus any call premium costs and allows for early repayment. Interest rates have declined greatly in the economy, most of the time because it is a bond issuer, it is. The issuer issues new securities to current securities and lower interest calls. For this you have to pay each year for the issuer to reduce interest payments
Bonds: bonds are also long term debts that are issued by government or business, which indicates that an amount of money has