Characteristics of Bonds and Financial Assets

An asset is defined as any type of property that possesses monetary value.
Categories of assets held by individuals include: - Real property such as houses. - Personal property such as cars.
Categories of assets held by businesses typically take the form of physical capital, such as: - Machinery. - Tools.
Financial assets are a specific subset of assets described as intangible properties whose monetary value is derived from a contractual claim.
Tradeable financial assets are commonly referred to as securities.
Notable examples of financial assets include: - Stocks. - Bank deposits. - Bonds.

Bonds are debt instruments issued to investors by various entities for the purpose of raising funds.
Functional logic: The bond issuer sells the bond to generate immediate income, while the investor receives payment in the form of interest and the eventual return of the principal.
Face Value (Principal): - This is the amount that investors typically pay to purchase the bond at issuance. - It represents the specific sum that bond issuers are required to repay to the investor once the bond has been held for the predetermined duration.
Maturity Date: - This is defined as the specific date when the face value (principal) of the bond will be repaid to the investor in full.
Bond Yield: - The yield is the annual amount of interest payments received by the bondholder, expressed as a percentage of the bond's face value.

Hypothetical Maturity Scenario: - An investor purchases a bond with a face value of $\$1,500$ . - The date of purchase is January 1, 2050. - The issuer sets a maturity period of two years. - Result: The investor will be repaid the full $\$1,500$ principal on the maturity date of January 1, 2052.
Hypothetical Yield Scenario: - A bond with a face value of $\$1,000$ offers annual interest payments of $\$100$ . - Yield calculation: - $\frac{\$100}{\$1,000} = 0.10$ - This bond is described as having a $10\%$ yield.

Savings Bonds: - Issued by the United States Treasury to fund federal government operations. - These are considered among the least risky investments because they are backed by the credit of the United States federal government.
Municipal Bonds: - Issued by local governments, including cities, states, or counties. - These are frequently utilized to finance public works and community projects, such as: - Public school improvements. - Infrastructure repairs.
Corporate Bonds: - Issued by corporations to finance any aspect of business operations or expansion. - Unlike government bonds, corporate bonds vary significantly in risk level, ranging from investment-grade to junk bonds.

Yield Calculation Formula: - $\text{Annual Yield} = \frac{\text{Annual Interest Payments}}{\text{Face Value}}$
Example Calculation 1: - Face Value: $\$1,500$ - Annual Interest: $\$50$ - Yield = $\frac{\$50}{\$1,500} \approx 0.0333$ - Result: $3.33\%$
Example Calculation 2: - Face Value: $\$500$ - Annual Interest: $\$25$ - Yield = $\frac{\$25}{\$500} = 0.05$ - Result: $5\%$
Interest Accrual and Payment Frequency: - Interest payments are frequently accrued semiannually (twice per year). - For instance, a $\$1,000$ bond with a $4\%$ annual yield yields: - $\$1,000 \times 0.04 = \$40 \, \text{annually}$ - This results in payments of $\$20$ every six months.

Junk bonds are high-yield corporate bonds that feature exceptionally high risk.
They are characterized by a high risk of default, meaning the issuing corporation is more likely than other issuers to fail to make interest or principal payments.
Strategic tradeoff: To compensate for the high risk of default, junk bonds often offer significantly greater potential returns than investment-grade bonds.

Classification by Maturity Length: - Short-term Investments: Bonds with maturity dates less than one year from the date of issuance. - Long-term Investments: Bonds requiring one year or more to reach their maturity date.
Types of Financial Markets: - Money Market: The venue where short-term securities (maturities < 1 year) are bought and sold. - Capital Market: The venue where long-term securities (maturities $\ge$ 1 year) are traded.
Divisions of the Capital Market: - Primary Market: The market where investors purchase securities directly from the issuer. - Secondary Market: The market where investors trade securities with one another (this is where the majority of individual trading occurs).