Prentice-Hall, Inc.1Chapter 14Investing in bonds and other investmentsWhat are bonds?•Similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as the issuer. •The issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due. Why Consider Bonds?•Bonds reduce risk through _____________.•Bonds produce ____________ income.•Bonds can be a safe investment if held to maturity.•____________ (face value)-- the amount returned to the holder at maturity• _______________-- indicates the percentage of the face value that will be paid annually to the holder in the form of interest• _____________ -- a document that outlines the terms of the loan agreementBasic Bond Terminology and FeaturesBasic Bond Terminology and Features• ________________-- allows the issuer to repurchase the bonds before the maturity date• _______________-- money set aside annually to pay off the bonds at maturityBond investment considerations•Interest rate:– Fixed, floating or payable at maturity•Redemption features– Call provisions (when % rates drop)– Puts—you make issuer buy back bond (when % rates increase)•Tax status– Interest may or may not be taxable
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