Bond Presentation Handout from Class

8/13/2019 Bond Presentation Handout from Class

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Coupon Payments

Taxable

Tax-Free

Deferred

Zero Coupon Bonds

Frequency Corp Bonds every six months

Government Bonds six months

Mortgage-backed every month


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Credit Rating System

Credit Risk S&P Moodys Fitch

Prime AAA Aaa AAA

Excellent AA Aa AA

Upper Medium A A A

Lower Medium BBB Baa BBB


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Length of Loan

0Years

10Years

20Years

30 +Years

UltraShort

Short

Intermediate

LongTerm


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Ownership of Bonds

Bearer Bonds

Registered Bonds

Book Entry Bonds


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Inverse Relationship:

When Interest rates rise bond prices fall

When Interest rates fall bond prices rise

Interest Rate Risk


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Reinvestment Risk

In a declining interest rate environment,

you are forced to reinvest income or principal atthose lower rates


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Tomorrows dollar may have less purchasing power

Inflation Risk


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Some corporate, municipal and agency bonds have acall feature

Declining interest rates may accelerate theredemption of a callable bond

Call Risk


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May be unable to find a buyer or be forced to sell at

a significant discount to market value

Liquidity Risk


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For mortgage backed securities,the risk of declining interest rates,

or a strong housing market, willcause mortgage holders torefinance or otherwise repay their

loans sooner than expected

Prepayment Risk


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Treasury Notes & Bonds

Non-Callable

Tax Savings

Liquidity

Purchased through Bank, Broker or US Treasury

30 year Bonds discontinued in 2001- Still bought on open market & reintroduced02/ 09/ 2006

Notes issued in shorter terms of 2 years, 3 yrs, 5yrs, 7 yrs and 10 yrs


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Bought at a discount

Terms of 4 weeks, 13 weeks and 26 weeks

Auctions occur in Feb, May, August and November.

Bought through Banks, Brokers, at US Treasury

T-Bills


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TIPS

Term is ten years

Coupon is fixed

Interest Payments every 6 months

Inflation Adjusted Principal not

paid until maturity

Semi-annual interest payments basedupon inflation-adjusted principal

Taxes due every year on adjustedamount

Bought through your bank, broker or atthe US Treasury


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Significant Tax Benefits

Revenue Bonds Bridge Tolls

Sewer Bonds

General Obligation (GO) Bonds Full Faith & Credit of Issuer

Muni Bonds


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Secured or asset-backed bonds:

Mortgage Bonds

Equipment Trust Certificate

Collateral trust Certificate

Debentures:Not secured by property

Dependent upon assets and earning power of the issuer

Types of Corporate Bonds


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Federal National Mortgage Association (Fannie Mae)

Federal Home Loan Mortgage Association (Freddie Mac)

Government National Mortgage Association (Ginnie Mae)

Examples


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Current Yield Formula for Bonds

Annual Coupon Payment = Current Yield

Price of Bond

Example: $60.00 = 7.5% Current Yield

$800.00

Key Formulas


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Taxable Equivalent Yield (TEY) for Munis and Treasuries

Muni Yield/100% -28% Federal Tax Bracket = Taxable Equivalent Yield

Example: 4% Muni Yield/100 - 28 = 5.5 TEY

Treasury Yield/100% - State Tax = TEY for Treasuries

Example: 4% Treasury Yield/100 - 11 = 4.49

Key Formulas

Yield to Maturity Approximation Formula for Bonds:

( Annual Interest Payment + (Par Value-Current Bond Price)/ # of Years to Maturity )

divided by (Par Value + Current Bond Price)/ 2

Key Formulas


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When the bondholder pays:

Less than par value- (discount) Yield to maturity>Current Yield > Nominal Yield

Par Value- Nominal Yield = Current Yield=Yield to Maturity

More than par value- (premium) Nominal Yield > Current Yield > Yield to Maturity

Summary of Bond Yield Relationships

Stability

Diversification

Income

Why Own Bonds-Lending vs. Owning


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WSJ

http:/ / treasurydirect.gov

www.investinginbonds.com

www.bondsonline.com

Moody's

Standard & Poor's

Where to go for information


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The End

Seeing Is Not Believing

W hich gray circle is bigger? Which gray bar is longer? Are the gray horizontal lines parallel?

2009 Morningstar, Inc. All rights reserved. 3/1/2009


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Rational Minds Can Act Irrationally

2009 Morningstar, Inc. All rights reserved. 3/1/2009

They are the same size They are the same size The horizontal lines are parallel

Keys to Successful Investing


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Set Guidelines that Work


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Philosophy determines direction

Learn to Pay Yourself First:

#1 Error:Failure to set Financial Goals


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When should you start to payyourself?


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Immediately!

When should you start to payyourself?

According to Bureau of Labor Statistics

Average Consumer spends $5.60 per day on

non-alcoholic beverages

Over 40 years, at an average stock market return,

this equals $______________

Drinking your retirement away?


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According to Bureau of Labor Statistics

Average Consumer spends $5.60 per day on

non-alcoholic beverages

Over 40 years, at an average stock market return,

this equals$904,659.18

Drinking your retirement away?

When to start your retirement savingsplan?

NOW!


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The value of starting your retirementsavings now

Age Years Amount Rate Balance

25 40 $3,000.00 10.00% $1,327,777.00

45 20 $23,182.00 10.00% $1,327,777.00

50 15 $41,790.00 10.00% $1,327,777.00


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Are you protecting your current income and future income?

- Look at all aspects of risk including disability, life insurance, medical, liability coverage, LTC.

Fund your retirement before your children's education

Be careful about paying off your home mortgage faster

Prioritize your financial goals


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Develop a long-term InvestmentPerspective

There Have Always Been Reasons Not to InvestWorld Events

Black TuesdayCrash of New

York StockExchange

10/29/29

2003PresentOperation

IraqiFreedom

2008GlobalCredit

Meltdown

KoreanConflict

195053

10/24/29Black Thursday

Plunge of New YorkStock Exchange

1962CubanMissileCrisis

193945World War II

197981Iran

HostageCrisis

1988Savings &

LoanCrisis

10/27/97Bloody Monday

Fall of Dow JonesIndustrial Average

Vietnam War(U.S. Engagement)

196473

Black MondayFall of Dow JonesIndustrial Average

10/19/87

OperationDesertStorm

1991

SubprimeLending

Crisis

2007

Attacks onthe World

Trade Centerand Pentagon

9/11/01


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75

Most Years Have Been Positive

HISTORY FAVORS A RETURN TO THE MEAN

Calendar Year Returns for the S&P 500 Index, 19262011

This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.

Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index.

Past performance does not guarantee future results.

76

The Same Goes for Decades


10-Year Rolling Returns for the S&P 500 Index


Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index.



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77

The Five Worst 10-Year Roll ing Periods

What Happened Next?


S&P 500 Index Worst 10-Year Returns and Subsequent 10-Year Returns


Source: 2012 Morningstar. Indexes are unmanaged and one cannot invest directly in an index. Since no subsequent 10-year results are available

for years past 2001, only the 10-year period ended 2008 was included to demonstrate that the next 10 years are still unknown. For the 10-year

periods ended 2009, 2010 and 2011, the S&P 500 Index returned -0.95%, 1.41%and 2.92%, respectively.



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Maintaining your buying power

Understanding the real risk to yourfinancial well-being

Longevity Risk

Age

Years


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Inflation Shrinks Your Buying Power

1991

2011

2031

$0.29

$0.44

$0.72

U.S. Stamp

$15,473

$25,245

$41,313

New Car

$16,276

$28,500

$46,640

College Tuition

$2.80

$3.57

$5.83

Gallon of Milk

Inflation Risk


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Concentrated positions

Market timing

Overconfidence

Would you rather have $2 million or $1.7 million inyour retirement portfolio?


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Scenario 1:

Married couple

Husband 65-Wife 62

$2,000,000 in total assets

$60,000 withdrawn/annually from portfolio

50% Concentrated Portfolio, the rest invested 60/40

Keep Principal Intact

Concentrated Portfolio


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Scenario 150% Concentrated Portfolio

35% Failure rate

Diversified Portfolio

Scenario 2:

Married couple

Husband 65-Wife 62

$1,730,000 in total assets

$60,000 withdrawn/annually from portfolio

Rebalanced Portfolio 60/40

Keep Principal Intact


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Scenario 2Diversified 60/40 Portfolio

3% Failure rate

Asking the right question could bethe key to your success

Would you rather have a 35% failure rate or a

3% failure rate in your retirement portfolio?


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Dangers of Market Timing


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Performance of the S&P 500 IndexDaily: January 1, 1970-December 31, 2011

Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2011 provided by Bloomberg.The S&P data are provided by Standard & Poors Index Services Group. US bonds and bills data Stocks, Bonds, Bills, and Inflation Yearbook, Ibbotson Associates,Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional FundAdvisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliableand current, but accuracy should be placed in t he context of underlying assumptions. This publication is distributed for educational purposes and should not be consideredinvestment advice or an offer of any security for sale. Past performance is not a guarantee of f uture results. Unauthorized copying, reproducing, duplicating, or transmittingof this material is prohibited.Date of first use: June 1, 2006.

LT1330.8

$50,662

$45,431

$32,940

$19,130

$12,068

$9,190

Growthof$1,000

Tot al Period Missed 1Best Day

Missed 5 BestSingle Days



One-MonthUS T-Bills

AnnualizedCompound Return 9.80% 9.51% 8.68% 7.28% 6.11% 5.42%


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Time periods greater than one month are based on monthly rolling periods, and dates indicated are end of period.The S&P data are provided by Standard & Poors Index Services Group.Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information containedherein is compiled fromsources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed foreducational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of futureresults. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.Date of first use: June 1, 2006.

LT1330.8

Performance of the S&P 500 IndexDaily: January 1, 1970-December 31, 2011

The best single day was October 13,

2008.

The best one-month return, October

1974, happened immediately after the

second-worst one-year period.

The occurrence of strongly positive

returns has been especially

unpredictable. Investors attempting to

wait out an apparent downturn ran a

high risk of missing these best periods.

Nine of the top 25 days occurred

between September 2008 and February

2009, during which time the S&P

dropped 41.8%

Five of the Top 10 days occurred

between October 2008 and November

2008, during which time, the S&P 500

dropped 21.5%.

0%

2%

4%

6%

8%

10%

12%

14%

Day Month 3 MonthsEnding

6 MonthsEnding

12 MonthsEnding

10/13/08 10/74 10/82 6/75 6/83

10/19/87 10/87 11/08 2/09 2/09 Worst Periods andthe Return IfMissed

Best Periodsand the ReturnIf Missed

Best/Worst Missed Period

Total Period

9.51% 9.40% 9.18% 8.89% 8.56%

11.29%11.22%10.72%10.43%10.36%

9.80%

AnnualizedCompoundReturns%

Indices arenot availablefor direct investment; itsperformancedoes notreflect theexpenses associated with themanagement of an actualportfolio. Past performanceis no guarantee of futureresults. TheS&P data areprovided by Standard & PoorsIndexServices Group.Bull andbear markets aredefinedin hindsightusingcumulativemonthlyreturns.A bear market(1) beginswithanegativemonthlyreturn,(2) must achieve a cumulative returnlessthanor equalto -10%, and (3)endsat themostnegative cumulative returnprior toachieving a positivecumulativereturn. Alldatapoints which arenot considered partof a bearmarketare designated asa bullmarket.

Bull and Bear MarketsS&P 500 Index (USD)

Monthly Return s: January 1926June 2011

6 mos.-30%

2 mos.-19%

6 mos.-21%

4 mos.-10%

44 mos.

193%

2 mos.

92%6 mos.

100%3 mos.

26%4 mos.

12%

34 mos.-83%

23 mos.

133%9 mos.

61%5 mos.

22%

13 mos.-50%

4 mos.-16%

31 mos.-30%

6 mos.-22%

49 mos.210%

116 mos.491%

5 mos.12%

48 mos.105% 43 mos.

90%26 mos.

52%

7 mos.-10%

5 mos.-15%

6 mos.-22%

6 mos.-22%

30 mos.76%

9 mos.55%15 mos.

35%

19 mos.-29%

33 mos.86%

21 mos.-43%

3 mos.-11%

14 mos.

-14%

20 mos.-17% 3 mos.

-30%

5 mos.-15%

2 mos.-15%

25 mos.-45% 16 mos.

-51%

61 mos.282%

92 mos.355%

30 mos.71%

24 mos.63%

61 mos.108%

Feb 2009

Jun 2011-8%

Months = Duration of Bull/Bear Market% = Total Return for the Bull/Bear Market

Average Duration

Bull Market: 32 MonthsBear Market: 11 Months

Average Return

Bull Market: 119%Bear Market: -27%


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Thinking you are smarter than the market

Missing Opportunity

Strong performance among a few

stocks accounts for much of the

markets return each year.

There is no evidence that managers

can identify these stocks inadvanceand attempting to pick

them may result in missed

opportunity.

Investors should diversify broadly

and stay fully invested to capture

expected returns.

9.6%

6.2%

-0.7%

All US Stocks Excluding the Top10%

of Performers

Each Year

Excluding the Top25%

of Performers

Each Year

Compound Average Annual Returns: 1926-2011


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Creative Destruction

Failure to understand Capitalism


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Allowing Uncle Sam to determine yourportfolio structure


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Splitting your investment exactly as the assets are offered

Way too much in company stock

Naive 401k Investing


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Allocation of various retirement plans:

TIAA-CREF: One Stock Fund, One Fixed Income

50/50 Stock/Bond

TWA Pilots: Five Stock, One Fixed Income

75/25 Stock/Bond

University of California: One stock, Four Fixed Income

34/66 Stock/Bond

Naive 401k Investing


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Tip shopping

Investing based upon your

(buddy, family CPA, Stockbroker) hot idea

Avoid chasing the hot stock


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Loss Aversion is a documented phenomenon

We all hate to admit our mistakes

Understand the mathematics of losses

50% loss means 100% gain to breakeven

80% loss means 400% gain to breakeven

"Get-Evenitis"


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96% of new money in 1999 was invested in Technology or Growth Stocks

85% of new money in 2002 was invested in Bond Funds

2006-2007 International Funds were the hot item

Herding Effect


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Market

ReturnInvestor

Return

Investor

Misbehavior

Gap

Investor Misbehavior

Benchmark Returns & Inflation


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Average Mutual Fund Retention Rates

3.29 3.09

4.42

0

1

2

3

4

5

Equity Fixed Income Asset Allocation

Average Mutual Fund Retention Rates

(Based on 20 - Year Analysis)

Y

ears

Annualized 20 Year Investor Returns

3.49 %

7.81 %

0.94 %

6.5 %

0

1

2

3

45

6

7

8

9

Average Equity

Investor

S&P 500 Average Fixed

Income Investor

Barclays Aggregate

Bond Index

Annualized Investor Returns vs. Benchmark


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The cost of misbehaving

$100,000.00 invested

Market returns $ 449,967 over the last 20 years ending 2011

Investor returns = $198,594

Misbehavior Gap cost $251,372 InvestorReturn

$198,594

Market

Return

$449,967

InvestorMisbehavior Gap

$ 251,372


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A conservative method to address many of these issues we have covered tonight

A conservative method to address many of these issues we have covered tonight

What assets should you include in your portfolio?

How much should you have in stocks, bonds, real estate, cash.etc.

When should you rebalance?

Where does your home fit in your financial picture?

How does your IRA, 401k etc., fit into this picture?

Economic Hedging

Cash BondsDomesticEquities

InternationalEquities

Real Estate(REITs)

Gold/

Commodities


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Documents

Bond Presentation Handout from Class