Chapter+06 - Day 06: Chapter 6 We hear a lot about the...

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Day 06: Chapter 6 6-1 • We hear a lot about the stock market in the popular press, but not much about the bond market • It may surprise you to learn that the U.S. bond market is over twice the size of the U.S. stock market – Total outstanding debt in 2007: $29.2 trillion – Total market value of common stock: $14.2 trillion • In general, bonds are less risky than stocks – But, like all assets, high-yield bonds have higher risk Bond Market Overview • Bond Characteristics – Bonds are debt obligations • Corporations • Federal government and federal agencies • States and local governments – Bonds are also known as fixed-income securities • Amount and timing of cash flows are known – For the issuer, the bond is a loan that requires regular interest payments and repayment of the borrowed principal • U.S. Treasury bonds – Backed by the full faith and credit of the U.S. government – These have been considered the safest investments in the world – The federal government sells Treasury securities through public auction to finance the federal deficit – Maturities differ: • Less than one year: Treasury bills • One to ten years: Treasury notes • Greater than ten years: Treasury bonds • Treasury bonds are quoted in 32s of a percent – Example: a quoted price of 105:19 means 105 and 19/32 percent, or 105.594% of par. This translates into a dollar price of $1,055.94. • Corporate bonds quotes are listed as a percentage of par –Example: a quote of 97.876 translates into a dollar price of $978.76 • Corporate bonds are riskier than Treasuries and therefore offer a higher return • In the U.S., corporate bonds typically pay
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Chapter+06 - Day 06: Chapter 6 We hear a lot about the...

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