Notes given on 04/15/2015 over Chapter 11 Section 2. Also available on YouTube as video and audio. STRONGLY suggested you listen to it since some verbal notes will be on the test.

1. ECONOMICS
April 15, 2015
Chapter 11: Financial Markets
Section 11.2: Bonds and Other
Financial Assets

2. BONDS AS FINANCIAL ASSETS
Bonds are basically loans taken out by the
government, government-related groups, or
companies that must be repaid to the
investor.
Bonds are generally low-risk, so the return
is less than other investments.
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3. THREE COMPONENTS OF BONDS
1.Coupon rate = interest rate to be paid =
yield
2.Maturity = date when the loan is due
3.Par value = face value = amount to be
repaid
Bonds can be bought and sold just like any
stock.
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4. BONDS AT A DISCOUNT
The discount would be applied to the par
(face value) so that you could buy a $1000
bond for $960.
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5. BOND RATINGS
Because bonds are formed of loans taken
out, the company or government issuing
the bonds are subject to ratings just like
other borrowers.
Just like your personal credit rating, your
government wants the highest possible
(AAA, Standard and Poor’s).
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6. BONDS AT A DISCOUNT
A higher rating on the bonds might mean
you would pay more than the par value for
that bond.
The higher the rating, the higher the price
of the bond. This is good for the company
selling the bonds and for the individual
selling their bonds.
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7. ADVANTAGES AND
DISADVANTAGES OF BONDS
Once the bond is issued, the coupon rate
will not change.
Bondholders do not own a part of the
company, only a part of the company’s
debt.
If the company does poorly, the bonds
could be downgraded and be harder to sell
or liquidate.
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8. TYPES OF BONDS
Savings Bonds: bonds sold by the US
government; interest is paid when bond
matures; original bond is discounted
Treasury Bonds, Bills and Notes: issued by
the US Treasury; backed by the “full faith
and credit” of the US government
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9. TYPES OF BONDS
Municipal Bonds: same type of bonds, but
sold by city governments, as well as state
and county governments
Corporate Bonds: sold by corporations;
have higher risks than those issued by
governments; backed by “future profits”;
regulated by the Securities and Exchange
Commission (SEC).
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10. TYPES OF BONDS
Junk Bonds: have the highest return of any
bonds, but also the higher risk of default on
payments.
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11. OTHER TYPES OF FINANCIAL
ASSETS
Certificates of Deposit: a contract with a
financial institution for a depositor to leave
a certain amount of money on deposit for a
specified time in order to earn a specified
interest rate.
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12. OTHER TYPES OF FINANCIAL
ASSETS
Money Market Mutual Funds: money is
collected from a group of investors and is
invested by a financial institution to buy
stocks, bonds or other financial assets;
investors receive higher returns; deposits in
mutual funds are NOT covered by the
FDIC.
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13. FINANCIAL ASSET MARKETS
Financial asset markets can be described
based on the length of the investment or
based on whether the asset can be resold.
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14. FINANCIAL ASSET MARKETS
Time-based classification:
Capital market: investments that last
longer than a year (long-term CDs,
corporate or government bonds that
require long periods of time to
mature)
Money market: investments that are
shorter than a year (short-term CDs,
T-bills, money market mutual funds)
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15. FINANCIAL ASSET MARKETS
Can the asset be resold?:
Principal market: only the original
investor can redeem the asset
(savings bonds, small certificates of
deposit)
Secondary market: assets can be
resold to other investors who may
resell them again or redeem the asset
later on (virtually all other types of
financial assets)
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16. CHECK QUESTION 11.2
Write complete question and answer on your Bell Ringer form.
Describe five different types of bonds.