Print pf

Why Investors Purchase Corporate Bonds

  • Psychology of Investing in Bonds

    • Asset allocation: Bonds help diversify the investment portfolio.

    • Safety: Considered safer than stocks since they must be repaid at maturity.

    • Potential for more growth and income compared to other conservative investments.

Interest Income from Bonds

  • Interest Payments:

    • Typically received semi-annually.

    • Calculated as annual interest = interest rate × face value of the bond.

  • Types of Bonds:

    • Registered Bond: Interest checks are sent directly to the bondholder.

    • Registered Coupon Bond: Registered for principal only; interest paid to coupon holder.

    • Bearer Bond: Issued by foreign countries, not the U.S.

Market Value and Bond Repayment

  • Dollar Appreciation of Bond Value:

    • Can sell the bond for a higher price if its interest rate exceeds that of new bonds.

    • Inverse relationship between bond price and interest rates.

    • Approximate Market Value Calculation: = Annual interest / Comparable interest rate.

  • Holding or Selling Bonds:

    • An investor can hold the bond to maturity or sell it anytime.

Yield and Bond Ladder

  • Yield: Expected return of a bond held for a stipulated time, usually a year.

  • Bond Ladder Strategy: Purchasing bonds with different maturities to balance risk and return.

Example of Bond Market Value

  • Bank of America Bond Calculation:

    • Given: 5.50% interest on $1,000 face value, annual interest is $55.

    • If comparable bonds pay 6%, then the market price = $55 / 6% = $917.

Mechanics of Bond Transactions

  • Bonds are primarily sold via brokerage firms or online platforms.

  • Commissions: Charged when buying and selling bonds, generally lower with discount brokers.

Government Bonds and Securities

  • Governments issue bonds to fund operations, covering federal, state, and local levels.

  • U.S. Treasury Securities:

    • T-Bills: Short-term maturities (4-52 weeks), sold at a discount.

    • T-Notes: Maturities of 2-10 years, interest paid semi-annually.

    • T-Bonds: Long-term (30 years) with higher interest rates.

Treasury Inflation-Protected Securities (TIPS)

  • Issued in increments of $100, valued by CPI.

  • Principal adjusts with inflation; interest varies, paid semi-annually.

Evaluating Bonds for Investment

  • Use the Internet to:

    • Obtain bond price and trade online for lower commissions.

    • Research corporate and government bonds.

Sources of Investment Information

  • Useful Websites: MorningStar, Yahoo!, FMS Bonds, Moody's, Standard & Poor's.

Retirement Planning Objectives

  • Recognize the importance of retirement planning by analyzing assets and liabilities.

  • Understand expenses, income needs, and housing requirements for retirement.