This document provides an overview of bonds and bond investing presented by Louis Wolkenstein of The Investment Advisor LLC. It covers disclosure about the firm, what will be covered in the presentation including an overview of the bond market, how bonds work, types of bonds, cash and cash equivalents, and risks. It discusses the inverse relationship between price and yield of bonds, how bond prices are affected by interest rate changes, ratings, currencies, and the yield curve. It also covers various types of bonds in more detail and benchmarks for bond performance. The presentation applies the concepts to the current economic environment. It recommends short-term fixed income investments given current uncertainty and defines cash and cash equivalents.
Vip Call US 📞 7738631006 ✅Call Girls In Sakinaka ( Mumbai )
Investing in Bonds-A Bond Primer
1. We Have The Answers to Your Questions
Investing in Bonds
A Bond Primer
Presented by Louis Wolkenstein
Managing Principal
The Investment Advisor LLC
(570)815-0770
2. Disclosure
The Investment Advisor LLC is a Registered Investment Advisory Firm
Registered Solely in the State of Pennsylvania. Pennsylvania is the
Only State in Which The Investment Advisor is Registered to Conduct
Business. Therefore, Only Residents of the State of Pennsylvania or
Businesses with a Physical Place of Business and Who Conduct
Business in Pennsylvania May Consider This Presentation an Offer to
Conduct Business. If You Are a Resident of a State Other Than
Pennsylvania or a Business That Does Not Have a Physical Place of
Business and Conduct Business in Pennsylvania You May View This
Presentation for Informational Purposes Only. If You Are a Resident or
Business That Does Not Reside in or Have a Physical Place of
Business and Conduct business in Pennsylvania This Presentation is
Not an Offer or Solicitation to Conduct Business in any State Other
Than in Pennsylvania.
3. • Further Disclosure
By Providing this Presentation The Investment Advisor is
Not Recommending the Purchase of Any Investment.
Nor is The Investment Advisor Making Tax or Legal
Recommendations. All Information is Advisory or
Analytical Only. Investment Recommendations Can Only
be Made in Individual Consultation With Each Client
After They Have Disclosed Their Individual Personal
Financial Circumstances.
4. What Will We Cover Today
• Overview of The Bond Markets
• How Do Bonds Work
• Historical Performance and Returns
• Types of Bonds
• What are Cash and Cash Equivalents
– If You Have Questions Ask Your Presenter Lou Wolkenstein
5. The Bond Market
• 10 Times Larger Than the Stock Market
• Also Known as Fixed Income
–
6. Why Are Bonds Important
• Bonds Are Barometers and Benchmarks of Where Interest Rates Are for
Various Time Periods
• Bonds Help Set Rates for Mortgages, Car Loans, Credit Cards and Other
Types of Loans
• Bonds Help Indicate the Health of the Economy
• Bonds Are an Asset Class That When Used Properly and Understood Can
Provide Stability for Your Investment Portfolio
• Understanding Bonds Can Help You Make Personal Financial Decisions in
Relationship to the Economy Locally, Regionally and Nationally
7. The Capital Markets
• Their Purpose is to Create an Orderly and
Transparent Way to Raise Money
8. Purpose is to Raise Capital
• Companies Issue Stock to Raise Money in
Exchange for Shares of Ownership in the
Company
• Organizations and Companies Borrow Money
by Issuing Bonds That Pay Interest for the
Loan
10. Types of Bonds
• United States Treasury Bonds
• United States Agency Bonds
• Bonds Issued by Government Sponsored
Enterprises (GSE’s)
• Municipal Bonds
• Corporate Bonds
• Mortgage Bonds
11. Characteristics of Bonds
• Price and Value is Expressed on a Yield
Basis as a Percentage of Par Value
• Par is Generally $1000 Per Bond
– You Pay $1000 for the Bond When it is Issued
– You Get Paid Back $1000 When the Bond
Matures
12. Characteristics of Bonds
• Bonds Have Maturity Dates When the
Principal Value of the Bond is to Be Payed
Back
• Under 1 Year
• 1 year
• 2 year
• 5 Year
• 10 year
• 20 year
• 30 Year
13. What Does Yield Mean
• DEFINITION of 'Yield'
– The income return on an investment. This refers
to the interest or dividends received from a
security and is usually expressed annually as a
percentage based on the investment's cost,
its current market value or its value.
14. Types of Yields
• Current Yield-Yield Based on Current Price and What Return
is if Held for a Year
• Yield to Maturity-What the Yield Will be if Held to Maturity
• Yield to Call-What the Yield is Based on the Nearest Call Date
15. Bonds Can be Callable
– Where the Issuer Reserves the Right to Redeem Your
Bond at a Date Prior to Maturity at a Predetermined Price
• Can Happen When Interest Rates Are Falling
– This is What Has Happened Since the Financial Crises.
Bond issuers Called Bonds Issued at a Higher Rate and
Issued New Bonds at the Prevailing Lower Rate.
• But Now Rates Are Rising
16. Secondary Market Value
• Bonds Fluctuate in Value on the Secondary Market
After Original Issuance
– The Secondary Market is Simply Where the Bond Can be
Bought or Sold After it is Originally Issued (Original
Issuance is Done Through a Process Called Underwriting)
– Fluctuation is Based on:
• Direction of Interest Rates
• Ratings
• Currency Values
17. Trades at Par, a Premium or
Discount
• Par is Generally $1000 per Bond
• Discount is the Amount the Price of the Bond Trades Below
Par
• Premium is the Amount the Price of the Bond Trades Above
Par
18. Bond (Fixed Income) Secondary
Market Values
• Inverse Relationship Between Price and
Yield
– If You Have Questions Ask Your Presenter Lou Wolkenstein
19. Inverse or Opposite Relationship
Between Price and Yield
• So as a Bond is Bought the Price Goes up Because of the Demand for the
Bond
• As the Price Increases the Yield of the Interest the Bond Pays Falls Relative
to its Price
• A Bond Bought at $1000 With an Interest Payment of 2.3% Pays $23 and
Yields 2.3% ($23/$1000=2.3%)
• A Bond Bought at $1010 with an Interest Rate of 2.3% Pays $23 but Yields
only 2.277% ($23/$1010)
• Yield Allows a Basis of Comparison For Many Different Bonds Being Sold at
Different Prices at Different Interest Rates
20. Inverse or Opposite Relationship
Between Price and Yield
• So as a Bond is Sold the Price Falls Because Selling the
Bond Indicates a Lack of Demand Which Means it is Worth
Less
• As the Price Decreases the Yield of the Bond Rises Relative
to It’s Price
• A Bond Bought at $1000 With an Interest Payment of 2.3%
Pays $23 and Yields 2.3% ($23/$1000=2.3%)
• A Bond Bought at $990 With an Interest Rate of 2.3% Pays
$23 But Yields 2.323% ($23/$990=2.32%)
22. When Interest Rates Rise the Price of a Bond
Will Go Down on the Secondary Market
Causing the Yield to Rise
– Why: Because the Bond You Bought Was Purchased When Rates Were Lower
– The Bond You Own is Now Less Valuable Because I Can Now Buy the Same
Bond, With the Same Maturity at a Higher Rate of Interest
– Therefore, the Bond You Own is Now Repriced on the Secondary Market
– The Bond You Bought at Par (or $1000.00 Face Value) at an Interest Rate of
2.3% (called its Coupon) May Now Only be Worth $950.00 When I Can Buy the
Same Bond with the Same Maturity at 2.5%. How Much the Price Moves
Depends on the Magnitude of the Move in Interest Rates
– You Always Have the Option to Hold Your Bond to Maturity and Get Your Par
Value ($1000.00) Back
23. When Interest Rates Fall the Price of a Bond
Will Go Up on the Secondary Market Causing
the Yield to Fall
– Why: Your Bond at an Interest Rate of 2.3% is
More Valuable Than Bonds That are Newly
issued at a rate of 2%.
– Your Bond Purchased at Par ($1000), With a
Coupon of 2.3%, With a Maturity of 10 years, May
be Worth $1010, When the Same Bond With the
Same Maturity is Only Paying Interest at 2%
24. Ratings
• Statistical Ratings Organizations
– Standard & Poor
– Moody’s
– Fitch
– Rate Credit Worthiness of Companies, Countries, States,
Municipalities, Provinces and Other Entities
• Equity
• Debt
26. Effects of Ratings on Bonds
• As a Bond’s Rating Improves the Value of the Bond
Rises Relative to its Prior Rating
• As a Bond’s Rating Decreases the Value of the Bond
Will Fall
27. Effect of Currencies
• If I Buy Bonds (or Other Assets) in U.S. Dollars and the Dollar
Rises Relative to Other Currencies, the Value of My Bond Will
Increase Relative to Similar Bonds Denominated in the
Currency That Fell in Value Relative to the U.S. Dollar.
• As the U.S. Economy Improves Relative to Other Countries,
Assets Denominated in U.S. Dollars Will Rise.
• Also Note-This May Not Be Applicable to All Assets Such as
Gold Which Tends to Drop as the Dollar Rises
28. It Also Works in Reverse
• If I Buy Bonds in U.S. Dollars, and the Dollar Falls Relative to
Other Currencies, the Value of Your Bond will Decrease
Relative to Similar Bonds Denominated in the Currency That
Rose in Value Relative to the U.S. Dollar.
• As the U.S. Economy Declines Relative to other Countries,
Assets Denominated in U.S. Dollars Will Fall Against Assets in
the Country Whose Economy Rose Against the US Economy
30. The Yield Curve Relative to Risk
As the Maturity Increases the Interest Rate Rises and
So Does Risk
31. Types of Risk
• Interest Rate Risk Reinvestment Risk
• Inflation Risk Credit and Default Risk
• Political Risk Call Risk
32. Let’s Review the Types of Bonds
If You Have Questions Ask Your Presenter Lou Wolkenstein
33. Treasury Bills, Bonds and Notes
• Issued by the US Treasury
– Risk Free
• Why
– Secured by the Federal Governments Ability to Tax
– Full Faith and Credit of the United States Government
– Interest Exempt From State and Local Taxes
34. Bonds Issued by US Government Agencies
– Second on the Risk Scale Below Bonds Issued by the US
Treasury
» HUD/Government National Mortgage Association (Ginnie
Mae) -
» Small Business Administration
35. Bonds Issued by Government
Sponsored Enterprises (GSE’s)
• Privately Held Corporations with the Public
Purposes Created by the U.S. Congress to
Reduce the Cost of Capital for Certain
Borrowing Sectors of the Economy
36. Government Sponsored
Enterprises (GSE’s)
• Members of These Sectors Include Students, Farmers and
Homeowners.
• Examples
– Federal Agricultural Mortgage Corporation (Farmer Mac)
– Federal Home Loan Banks (FHLBanks)
– Federal National Mortgage Association (Fannie Mae)
– Federal Home Loan Mortgage Corporation (Freddie Mac)
– Farm Credit System (FCS) Farm Credit Banks (FCBanks)
– Resolution Funding Corporation (REFCORP)
– Farm Credit System (FCS) Financial Assistance Corporation
– Sallie Mae (Education) (Now Navient)
37. Municipal Bonds
• A Municipal is a Bond Issued by a
Sovereign State of The United States
(Including Indian Tribal Governments),
Local Governments, Territories of the
United States, or Their Agencies
38. Municipal Bonds
• Includes Bonds Issued by:
– States
– Local Governments
– School Districts
– Turnpike Authorities
– Hospitals
39. Municipal Bonds
• Secured by
– The Full Faith and Credit of the Taxing Authority of the State (Known as
a General Obligation Bond)
– The Taxing Authority of the City or Jurisdiction Which Issued the Bond
– The Revenue Created by the Project for Which the Bond Was Created
to Finance (Known as a Revenue Bond)
40. Municipal Bonds Have a Special
Tax Status
• Federally Income Tax Free
• Can be State Tax Free Depending on the State You Live in
• Formula To Calculate
Taxable Equivalent Yield
42. International Bonds
• Bonds Issued in Jurisdictions Outside the U.S By:
– Countries
– Provincial Governments
– Municipalities
• Can be Sold Outside the U.S. or Inside the U.S.
43. Benchmarks of Performance
• A Benchmark is a Barometer of the Performance of an Asset Class Which Allows
You to View the Performance of the Asset Class at a Glance.
• Examples
• 10 Year Treasury Lehman Aggregate Bond Index
• 30 Year Treasury (Barclays) Lehman Brothers US Treasury Index
• S&P Municipal Bond Index JP. Morgan Government Bond Index
44. Effect of Inflation With Respect to
Bonds
• Erodes Purchasing Power-Therefore Erodes the
Value of the Income You Receive From Your Bond
50. Ways to Invest In Bonds
• Buy Individual Bonds
• Buy Mutual Funds That Invest in Bonds
• Buy an Exchange Traded Fund or Index Fund that
Invests in Bonds
• Invest in Bond Options
• Buy Bond Futures or Interest Rate Futures
51. Caution About Bond Mutual Funds
• When Interest Rates Rise
• The Value of the Bonds in the Portfolio Will
Fall in a Rising Rate Environment
• The Yield May Increase as the Underlying
Value of the Portfolio Falls
52. Lets Apply What We Have Learned
to Our Current Economic Situation
• We Know The Fed Has Just Raised Short Term
Interest Rates
• We Know the Fed Intends to Raise Interest Rates
Further Based On How the Economy Performs
• We Know Rate Increases Lower the Prices of Bonds
and Increase Their Yields
53. Signals
• We Also Know Interest Rates on the
Secondary Markets Have Started to Decline
Based on the Recent Decline of the Yield on
the 10 Year Treasury
If You Have Questions Ask Your Presenter Lou Wolkenstein
54. We Know The Stock Market Has
Been Dropping as a Result of:
– A Reset In the Valuations of Stocks as a Result of the Feds
Rate Increase (We Got the Taper Tantrum After the Rate
Increase Instead of Before)
– Concern Over the Direction of Corporate Earnings
– Concern Over Future Short Term Interest Rate Increases
– Lower Liquidity Levels Caused by:
• The Ending of Quantitative Easing in 2014
• Higher Volatility
• A Flight to Safety Indicated by Falling Yields on Interest
Rates on the Secondary Market
55. Commodities at or Near Lows
• Commodities Prices Such as Gold, Silver,
Copper, Aluminum, Oil, Natural Gas and
Steel Have Dropped to Very Low Levels
Creating Deflationary Pressures
• The Fed Thinks the Drop in Price of Key
Commodities Such as Oil is Temporary
56. Projections for Growth
• Projections For Economic Growth Expressed
as Gross Domestic Product (GDP) Have
Dropped Substantially
• Projections for Asset Growth and Market
Performance Have Dropped to 4% to 6% for
the U.S. in 2016
57. On the International Scene
– China is Not Doing Well
– Europe is Doing Better, But Still Not Very Good
– Brazil is in Recession
– Japan is in Decline
– India-Projected Country With Highest Growth, But
Only 3% of World Economy
– Russia Has Become Our Adversary
58. There Are Several Economic
Scenarios Which Could Play Out
• We Continue as We Have. Growth Remains Slow
Inflation Remains Low
• Asset Values Fall, We Have Disinflation or Deflation
• Growth Picks Up, Inflation Rises, Asset Values Rise
59. Confused? So Are a Lot of People
– A Raise in Rates by the Fed Generally Indicates a Vote in Favor
of the Health of the Economy
– Economic Growth is Expected to be Only 2 to 2.5% for the Year
Defying the Need to Reach Escape Velocity of 3% or Better
– Various Economic Numbers Such as Manufacturing Have Fallen
Yet, The Auto Industry Has had a Great Year Selling Cars
– Unemployment Has Fallen to 5%
– Inflation is Projected to be at 2.5% By the End of the Year
– State Governments Not Doing Well: Pennsylvania Still Does Not
Have a Budget, Puerto Rico is in Default, Kentucky, Illinois and
Pennsylvania Have Pension Problems-Hawaii has High Debt
60. Creates a Case For Short Term
Fixed Income Investments
• Shorter Term Bond Investments of 5 Year
Maturities or Less Depending on Your Time Frame
for Need of the Money
• Fluctuate Less in Value Than Longer Term Bond Investments
• Preserves Principal
• Allows for Movement Into Other Investments Once We Get
Clarity (Is the Market Correcting or Are Our Problems Simply
Not Getting Better)
• Anchor Your Investment Portfolio in a Time of Uncertainty
61. What are Cash and Cash
Equivalent Investments
• Are Defined as Fixed Income or Bond
Investments That Have a Maturity of 1
Year or Less.
62. What Are the Common Factors Between
Cash and Cash Equivalent Investments
• Time: Maturity of 1 Year or Less
• Low Risk
• Easily Converted to Cash
• Can Generally be Liquidated Quickly Without the Loss of Principal
• Liquidity: Funds Can Be Accessed at Any Time
63. Investment Concept
Liquidity
Liquidity Refers to:
1. A Market that Exists to Facilitate
Transactions in a Security
2. Buyers and Sellers Willing to Take the Opposite Side of
the Transaction
3. The Volume of Transactions that Occur
4. A Person or Entity Willing to Step in to Facilitate a
Buy or Sell Transaction of a Security When There is No
Buyer or Seller to Complete the Opposite Side of the
Transaction. Commonly Called a Market Maker
64. Types of Cash and Cash
Equivalent Investments
• Treasury Bills (Are Treasury Bonds With Maturities
of 1 Year or Less)
• Savings Account
• Bank Money Market
• (Bank Pays Higher Interest for a Higher Minimum)
• Certificate of Deposit
• Money Market Mutual Fund
(Net Asset Value or Share Price is
Managed to Be Equal to $1.00)
– Treasury
– US Government (Treasury and Government Agency)
– Municipal
• Short Term Commercial Paper (Short Term Corporate Debt With a Maturity
of 1 Year or Less (Typically 180 Days or Less)
65. Fees: Savings and Investments Are Not
Free
Banks, Savings and Loans, Credit Unions, Brokerage Firms, Mutual
Fund Companies:
• All Charge Account Fees, Commissions, Sales Charges and
Investment Expenses
• Have Minimum Balances and Investment Minimums
• Revenue Sharing With Investment Companies That Manage
Investments
66. How Do Bonds Fits Into Your Portfolio
www.theinvestmentadvisor.net
Presented by Louis Wolkenstein
Managing Principal
The Investment Advisor LLC
(570)815-0770 or (877)414-9021
