Today’s Schedule – 11/12

• Calculating Compound Interest• PPT: Saving & Investing Part2• HW:–Read 21.2

Bonds• Like an IOU stating that you loaned money

to the government or a corporation –Outlines the terms of repayment

• Buy the bond at a discounted rate• Bond has a fixed interest rate over a set

period of time• When the time is up bond is considered

“matured” and buyer can redeem bond for face value

3 Components of a Bond• Coupon Rate- Interest rate paid to the

buyer• Maturity- Time at which payment is due• Par Value- Amount paid for the bond

Discounted Bonds

• “Discount from par”• Buying a bond for less than its face value • Example- Spend $960 for a $1,000 bond–When bond matures will have earned

$40

Bond Ratings• Two firms rate bonds–Standard & Poor’s and Moody’s

• Ratings based on:–The ability of the issuer to pay the

interest rates–The ability of the issuer to repay the

principal–AAA (high interest rate) D

(low interest rate)

Advantages of Bonds

• Relatively safe• Interest rate doesn’t change• Buyer of a bond does not take part

ownership in the company

Disadvantages of Bonds

• Issuer must make fixed payments• Interest rate doesn’t change• Low bond ratings can make it hard to sell

a bond

5 Types of Bonds1. Savings Bonds

-$50- $10,000-Issued by the U.S. government-Purchased at discounted rate-Very safe

2. Treasury Bonds (“T-Bonds,” “T-Bills”)- Varying length of maturity

5 Types of Bonds

3. Municipal Bonds-Sold by state and local governments-Rating depends on financial health of state/local government-Not subject to income tax

5 Types of Bonds4. Corporate Bonds

-Issued in large denominations-Interest earned is taxable-Moderate risk levels-Watching by the Securities & Exchange Commission (SEC)

-Government agency that regulates financial markets and investment companies

5 Types of Bonds

5. Junk Bonds-Low ratings-Potential for high yield

4 Types of Financial Markets

1. Capital Market-Money lent for longer than a year-Ex.: CD, Bonds

2. Money Market-Money lent for less than a year-Ex.: CD, T-Bill

4 Types of Financial Markets

3. Primary Markets-Assets can only be redeemed by purchaserEx.: Savings bonds

4. Secondary Markets-Assets than can be resold-Ex.: Stocks