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Class 9 - AAA AA A BBB BB →Junk bond B→ Junk bond...

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Bonds Two Ways to make money 1. Earn it… a. Wages b. Interest c. Dividends d. Capital gains 2. Loan it…. BONDS Terms - Purchase: o PAR – face value $1,000 o Discount o Premium - Interest: coupon rate - Due Date: Date of maturity - Before Due Date: Callable bond Savings Bonds - EE o 1.40 % o Purchased at face value - I o 1.74 % o Fixed rate and rate of inflation Bonds Type: Length of Time - Types o Treasuries – 60 % Bill Short term (4 weeks – 1 year) One treasury bought at discount Note Long term (2 – 10 years) Bond Longer than 10 years Interest not taxed by state government (Michigan tax is 4 %) Agency Not federal government bonds o Municipals – 20 % No federal tax No state tax (select states) o Corporate – 12 % Loans to corporations - Reward! $1000 @ 5.2 % = $52 - Risk….
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o Taxes $52*.15 = $7.80 ~ $8 o Inflation .3*1000 = $30 - Risk yield o Corporate: high risk o Treasury: low risk o Municipal: medium risk - Bond Ratings o Moody’s Aaa Aa A Baa Ba → Junk bond o Standard and Poors
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Unformatted text preview: AAA AA A BBB BB →Junk bond B→ Junk bond Special Characteristics-Zero coupon bond o Phantom interest Why bonds?-Income!-May not be taxed at Fed and State level-Preserve principal-Usually pays higher interest than CD’s plus higher yield due to state tax exemption-Reduces risk of owning stocks (diversification) So what is so complex?-After tax yields o Comparison of muni’s/corp Municipals 3.5 % • Does not pay fed tax Corporate 5.3% • Pays fed tax o 3.45%-Bond price fluctuations o Fixed Coupon rate never changes o Variable Interest rate of the market o Bond prices change inversely to MARKET interest rates-Bond yield fluctuations o Bond price changes alter yields-Yield to maturity o Factors: Price at maturity Coupon rate Number of years to maturity Current price of the bond...
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Class 9 - AAA AA A BBB BB →Junk bond B→ Junk bond...

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