Unit 3 Bonds Need to Know

Bond

Investor is a creditor | Par usually $1,000 | Paid back at maturity | Most pay interest semiannually

Treasury Bills (T-Bills)

Maturity: 1 year or less | Issuer: U.S. Treasury | Interest: No periodic payments, sold at discount | State tax exempt | Lowest interest-rate risk | Tax: federally taxable; exempt from state and local income tax

Treasury Notes (T-Notes)

Maturity: 2-10 years | Issuer: U.S. Treasury | Interest: Semiannual | State tax exempt | Tax: federally taxable; exempt from state and local income tax

Treasury Bonds (T-Bonds)

Maturity: Over 10 years (up to 30) | Issuer: U.S. Treasury | Interest: Semiannual | Highest interest-rate risk among Treasuries | Tax: federally taxable; exempt from state and local income tax

TIPS

Issuer: U.S. Treasury | Principal adjusts for inflation | Semiannual interest | Protects against purchasing power risk| Tax: interest and inflation adjustment are federally taxable; exempt from state and local income tax

STRIPS

Zero-coupon Treasury | No periodic interest | Bought at discount | Matures at par

Zero-Coupon Bonds

No interest payments | Bought at discount | Matures at par | High interest-rate risk

Municipal Bonds (Munis)

Issuer: State/local governments | Interest generally exempt from federal tax | Usually pay semiannual interest

GO Bonds

Backed by taxes | Issued by municipalities | Usually safest muni bond | Interest generally federally tax-exempt

Revenue Bonds

Backed by project revenue | Airports, hospitals, toll roads, stadiums | Interest generally federally tax-exempt

TANs

Tax Anticipation Notes | Repaid from future tax collections | Short-term municipal note | Tax: interest generally federally tax-exempt; state treatment depends on residence and issuer

RANs

Revenue Anticipation Notes | Repaid from future revenues | Short-term municipal note | Tax: interest generally federally tax-exempt; state treatment depends on residence and issuer

TRANs

Tax and Revenue Anticipation Notes | Repaid from taxes and revenues | Short-term municipal note | Tax: interest generally federally tax-exempt; state treatment depends on residence and issuer

BANs

Bond Anticipation Notes | Repaid from future bond issue proceeds | Short-term municipal note | Tax: interest generally federally tax-exempt; state treatment depends on residence and issuer

Corporate Bonds

Issuer: Corporations | Interest taxable | Usually pay semiannual interest | More credit risk than Treasuries

Mortgage Bonds

Backed by real estate | Corporate bond | Secured bond

Debentures

Unsecured corporate bond | Backed only by issuer's creditworthiness

Subordinated Debentures

Unsecured | Paid after senior debt in liquidation | Higher risk

Guaranteed Bonds

Payment guaranteed by another company (often parent company)

Income Bonds

Interest paid only if company has sufficient earnings | High risk

Convertible Bonds

Can be exchanged for common stock | Gives investor upside potential

Collateral Trust Bonds

Secured by securities held in trust

Equipment Trust Certificates

Secured by equipment such as airplanes or railcars

GNMA (Ginnie Mae)

Agency security | Full faith and credit of U.S. Government | Mortgage-backed | Monthly payments | Prepayment risk | Tax: discount/interest generally taxable at federal, state, and local levels

FNMA (Fannie Mae)

Government-sponsored enterprise | Mortgage-backed | Monthly payments | No full faith and credit backing | Tax: discount/interest generally taxable at federal, state, and local levels

FHLMC (Freddie Mac)

Government-sponsored enterprise | Mortgage-backed | Monthly payments | No full faith and credit backing | Tax: discount/interest generally taxable at federal, state, and local levels

Commercial Paper

Issuer: Corporation | Unsecured | Maturity 270 days or less | Money market instrument | Tax: discount/interest generally taxable at federal, state, and local levels

Banker's Acceptance

Bank-guaranteed instrument | Used in international trade | Money market instrument | Tax: discount/interest generally taxable at federal, state, and local levels

Jumbo CDs

Issuer: Bank | Minimum $100,000 | Negotiable | Tax: interest generally taxable at federal, state, and local levels

Repurchase Agreements (Repos)

Sell now, buy back later | Very short-term financing | Usually overnight | Tax: income is generally taxable at federal, state, and local l

Federal Funds

Loans of reserve balances between banks | Usually overnight

Call Feature

Benefits issuer | Issuer can redeem bond before maturity | Common when rates fall

Put Feature

Benefits investor | Investor can force issuer to repurchase bond

Interest Rate Risk

Interest rates up = bond prices down | Interest rates down = bond prices up

Prepayment Risk

Common with mortgage-backed securities | Homeowners refinance or pay off mortgages early

Defualt/Credit Risk

Risk issuer cannot make interest or principal payments

Purchasing Power Risk

Inflation reduces value of fixed interest payments

Current Yield

Annual interest ÷ Current market price

Yield to Maturity (YTM)

Return if held until maturity

Yield to Call (YTC)

Return if bond is called early