Bonds and Mutual Funds

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Bonds and Mutual Funds

• Savings Accounts and Credit Scores The future
  of your savings!

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What is a bond?

• A bond is an IOU to a government or to a
  corporation.
• When you loan your money to a corporation,
  government or a government agency the ISSUER
  promises to pay you back with INTEREST .

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Bonds

• Issuers promise to pay you back a specific rate
  of interest called the COUPON RATE.
• You are usually paid interest then on a quarterly
  time rate for the life of the bond.

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Life of the bond?

• The period of time the issuer has to pay back the
  investor.
• The issuer also promises to pay back the FACE
  VALUE of the bond when the bond MATURES.

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Face Value

• ALSO called PAR VALUE or the PRINCIPAL.

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Why invest in bonds?

• USUALLY doesnt take much money to start.
• Safer investment
• Tax-free and risk-free return.
• THAT IS THE CHEERY PICTURE

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Opportunity Costs of Bonds

• What happens if INFLATION goes higher than the
  value of your bond?
• Interest on bond is 4 but inflation goes to 6.
• What happens if the rating on your bond goes
  south?

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How do you know if a bond is a good one?

• Seek Investment Grade Bonds
• Highest rated by MOODYS a service that rates
  companies and government bonds.
• Investment Grade least chance of missing
  interest payments
• Other good rating services for bonds include
  Fitch and Standard Poor.

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Grading Bonds

• AAA PRIME BONDS.
• AA or AA or AA- or Aa1, Aa2 or Aa3 HIGH GRADE
  BONDS.
• A to BBB- UPPER GRADE TO MID GRADE BONDS

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ANYTHING BB rated or below

• JUNK BONDS
• These are high risk bonds.
• More chance of DEFAULTING not paying you back!
• Often called HIGH-YIELD offering higher interest
  rates at the same maturity of Investment Grade
  Bonds.
• Also sometimes called Subprime bonds.

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4 Types of Bonds

• Corporate
• Municipal
• Agency
• Government

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Corporate Bonds

• Major source of corporate borrowing
• Debentures most common type of bond, backed by
  the general credit of the corporation.
• Asset Based backed by specific property or
  equipment of the corporation.

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What are the best corporate bonds?

• According to Moodys
• AAA
• ZERO!
• AAA
• JNJ
• GE
• PFE
• MRK
• UPS
• XOM
• ADP

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WORST Corporate Bonds?

• Downgrades of investment-grade companies shot up
  by 153 percent from the year-ago quarter to a
  record 96, while downgrades of junk-rated
  companies surged by 147 percent to 287.
• Moody's downgraded 1.76 trln U.S. corp debt in
  Q1
• Wed Apr 1, 2009
• SBUX is now rated BB
• BRK-A is now just AA

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QOD Why would someone say

• Provided the economy doesn't crash, junk bonds
  may be a great buy.

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Municipal Bonds

• Issued by states and local governments to raise
  money.
• General Obligation Backed by full faith and
  credit of the issuer.
• Revenue Bonds Based on income produced by a
  specific project.
• Kearneys Archway
• Lincolns proposed 250-million arena /
  convention center.

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Municipal Bonds

• Why would Moodys and Goldman Sachs urge people
  NOT to buy bonds in the highlighted states?
• BTW Nebraska Bond Rating is downgraded to AA
• Omaha AAA
• Lincoln AA
• California - BBB

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Municipal Bonds

• The minimum size of a municipal bond purchase is
  generally 5,000 of par value.
• Municipal bonds are sold and traded by dealers in
  an over-the-counter market
• there is no centralized exchange where municipal
  bond transactions take place.
• Investors buy municipal bonds from licensed
  securities dealers that actually own the bonds
  they sell.

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Agency Bonds

• Some government sponsored but privately owned
  corporations.
• Freddie Mac / Fannie Mae
• Sometimes specific projects that government wants
  to fund.

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Agency Bonds

• Often issue bonds to raise funds either to make
  loan money available or pay off a new project.
• No! Not that bond either!

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US Treasury Bonds

• Backed by full faith and credit of the US
  government.
• When government doesnt collect enough in taxes
  it issues notes, bills, and bonds to make up the
  difference.
• Bonds at least ten years to maturity
• Bills less than two years to maturity.

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Current Bond Rates

• EE bonds .7
• HH bonds 1.5
• NEW rates will be announced on November 1.

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Why have US Savings Bonds?

• 50, 75, 100, 200, 500, 1,000, 5,000 and
  10,000.
• Series EE Savings Bonds are purchased at half
  their face value.
• A face-value 100 EE bond is purchased for 50.

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Why have US Savings Bonds?

• These EE bonds will increase in value every month
  instead of every six months. Interest is
  compounded semiannually.

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What are the Opportunity Costs of US Savings
Bonds?

• Could the US be over leveraged?

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What happens if the US defaults?

• If new people or countries wont buy our debt
  (bonds) what then?

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Final Note on Bonds

• Bonds are considered FIXED INCOME INVESTMENTS.
• Fixed amount of interest to the bondholder for
  the use of their money

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Another type of purchase with the game MUTUAL
FUNDS

• A collection of stocks, bonds, and other
  securities owned by a group of investors and
  managed by a professional investment advisory
  firm.

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Mutual Funds

• The investment firm pools money from investors
  and invests it.

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Mutual Funds and Risk

• Some funds are CONSERVATIVE and others are more
  SPECULATIVE.

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Mutual Funds

• Help to DIVERSIFY a portfolio.
• DIVERSIFICATION Reducing risk by combining
  different investments so they arent going to be
  in step with one another.
• Mutuals Cannot
• Buy on margin
• Short-sell stock

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Mutual Funds Types

• Value Funds Only invest in stocks that the
  managers believe are UNDERVALUED.
• Socially Responsible Funds only invest in
  companies that have social responsibility.
• www.socialfunds.com

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Vocabulary with Mutuals

• Open-end Funds
• Funds that sell as many shares as investors want
  to buy.
• If you sell your shares, you sell them back to
  the fund.
• Closed-end Funds
• You buy these as shares, like stock.

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Vocabulary for Mutuals

• Large-Cap
• Generally a company with at least 5-billion in
  value of market capitalization.
• Mid-Cap
• 1-5 billion in market capitalization (value of
  the company or stock)
• Small Cap
• 250-million to 1-billion
• MICRO-CAP less than 250 million.

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The Best of Mutuals
Large Cap Value Fund
1yr. 5yrs. Expenses (as of assets)
American Funds American Mutual A -20.3
-0.4 0.60 Sound Shore
-25.3 -0.7 0.92 T.
Rowe Price Equity Income -24.9
-1.7 0.71 Vanguard Windsor II
-24.4 -1.4 0.39
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To find out more about Mutual Funds

• Morningstar.com

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Why do you save money?

• Major purchases
• Annual or semiannual bills
• Unexpected expenses
• Major long-term expenses.
• Amass wealth

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What are the benefits of putting your money in a
bank?

• Security
• Interest
• Money cannot be lost.

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Types of Savings Accounts

• Regular Savings Account
• OB require only a small deposit.
• OB LIQUIDITY can be converted to cash with
  little or no loss in interest payments.
• OC Most banks charge fees if balance too low.

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Types of Savings Accounts

• Money Market Deposit Accounts
• OB Generally higher interest rates offered.
  Depends on t-bill interest rates.
• OB/OC Fairly easy to withdraw.
• OC Interest rate might be lower than regular
  savings.

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Time Deposits

• CDs (Certificates of Deposit) required to leave
  money in account for a specific amount of time.
• Maturity When you can have your money back.

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Time Deposits

• USUALLY the longer in, the more interest earned.
  
• Depends on interest rates!
• Interest rate is established when the CD is
  purchased.
• Require minimum deposit.

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QOD

• If you had 1000 how would you save it?
• CD?
• Savings Account?
• Money Market?
• Bonds?
• Stocks?

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Terms to Know

• Compound Interest Interest added to the
  PRINCIPAL at regular intervals.
• Subsequent interest is based on the original
  principal and the interest!
• 1000 at 5 1005
• Compounded 1000 at 5 1157.63

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Terms to Know

• Simple Interest Interest calculated at regular
  intervals based SOLELY ON THE PRINCIPAL.
• 1000 at 5 1050 a year.
• 3 years, 1150

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Terms to Know

• Rule of 72 A way to calculate how long it takes
  your investment to double in value IF the
  interest rate is constant.
• 72/ interest rate time it takes to double.
• EXAMPLE 12 years for money to double at 6.

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Terms to Know

• 401K A retirement plan that has employees AND
  employers contributing. Funds grow TAX-FREE
  until you withdraw them!

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TERMS TO KNOW

• IRA Individual Retirement Account A personal
  savings account for retirement that is tax-free
  until you withdraw from the account.
• Variety of ways to set up the account to save for
  you!
• DIVERSIFY!

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Terms to Know

• Estate Plans Life insurance, house having a
  will to transfer funds and property.
• Can be big bucks to the taxman!