# 2 Introduction to Bonds Series

Question 1

Bond vs stock

Answer 1

Loan investment vs. Owned investment

Question 2

New issue

Answer 2

New issuing of a bond. This is a primary bond or primary market.

Question 3

Face Value

Answer 3

Initial value

Question 4

Coupon

Answer 4

aka yield; interest rate; paid twice a year

Question 5

Maturity

Answer 5

The length of time the bond is held. The initial amount, par value is returned, and the bond pays the bond holder typically semiannually.

Question 6

Bonds vs Notes vs. Commercial Paper/Bills (Maturity Comparison)

Answer 6

All are loanable investments 1. Bonds - 10-30 Yrs 2. Notes 1-10 years 3. Commercial Paper/Bills 1 year

Question 7

Callable Bonds

Answer 7

(Call) Bonds that can be redeemed early. Adv. You get your money back earlier Disadv. you lose all of the payments for the years that bond isn’t held.

Question 8

Interest Rate Risk

Answer 8

Recall that there is an inverse relationship between interest rates and bond prices. This introduces risk

Question 9

What factors influence the interest rates on bonds?

Answer 9

1) Federal reserve systems 2) Supply and Demand 3) Bond Maturity 4) Bond Issuers

Question 10

Supply and Demand for Bonds and the effects on Interest rates

Answer 10

1) High Demand or Low Supply leads to an increase in Bond Prices but Decreases in Bond yields 2) Low demand and high supply leads to decreasing bond prices but increasing yields.

Question 11

Bond Issuers and Interest rates

Answer 11

The better the credit rating, or ability to pay for a bond, the lower the coupon rate and yield. The lower the credit rating, the higher the coupon rate or the yield.

Question 12

Treasuries

Answer 12

T-bills, T-notes, and T-bonds. Issued by the US department of Treasury to allow the government to function. Backed by the full faith of the US government. Payments made by taxes paid by US citizens.

Question 13

muni

Answer 13

State or local government bonds.

Question 14

Bond issuers

Answer 14

1) Treasuries (US Department of Treasury) 2) Corporations 3) Munis (State and local bonds)

Question 15

Credit Risk

Answer 15

The risk that a bond issuer may default on the bonds principal and interest

Question 16

Priority of Clams

Answer 16

The order in which bills are paid to people if a company went belly up ( Secured creditors, unsecured creditors, then stockholders)

Question 17

Secured Creditors

Answer 17

Bankruptcy costs and banks with collateral

Question 18

Unsecured Creditors

Answer 18

Bond holders, banks without collateral, suppliers, employee pensions and payments

Question 19

Stockholders

Answer 19

Preferred then common stockholders

Question 20

Coupon rate vs. Bond Yield

Answer 20

Coupon rate is fixed. Unchanged from the get go, while the bond yield is subject to change based on environmental pressures

Question 21

Yield to Maturity

Answer 21

yield calculated based on current yields in the market, the coupon rate, and the face value at maturity.

Question 22

Call risk

Answer 22

The risk that a bond issuers will buy back your bond causing you to lose payments semiannually for however many years you are no longer holding the bond.

Question 23

Bond Ladder

Answer 23

Pursuing a portfolio with different types of bonds (Treasuries, Corporates, or munis), with different maturity dates, and different coupon payment schedules.

Question 24

Ladder Reinvestment

Answer 24

Returning the original principal of different bond maturity lengths back into your portfolio. This can be used to provide a pool of money to continue to invest in bonds.

Question 25

Bond Cashflow

Answer 25

Creating a portfolio of diversified bonds that pay you monthly and supplement your income. This can be beneficial because you consistently get income. However, after your bond matures, there is no guarantee that you will continue to find bonds that pay coupons at certain times of the year.