Ch 15 Investing in Bonds
Thursday, May 7, 2026 4:11 PM
Characteristics of Corporate Bonds
- Corporate Bond
○ A corporations written promise to payback a specified amount of money w/ interest
- The Maturity Date
○ A set date a corporation must pay back borrowed money
○ Maturity dates can range from 1-30 yrs after they’re issued
- Face Value (AKA Par Value)
○ The dollar amount the bond holder will receive at the bonds maturity
○ Usually $1,000 but can go as high as $5,000 or millions
○ They’re interest rates are sometimes referred to as the coupon rate
§ A coupon rate is a type of interest rate
- Bond Indenture
○ A legally binding contract w/ details of the conditions relating to the bond
- Trustee
○ A Trustee is a financially independent firm that acts as a representative to the bondholder
§ Usually a bank or financial institution, they report the trustees ability to make
payments & redeem bonds
Why Corporations Sell Corporate Bonds
- Why they sell bonds to obtain money:
○ Not enough money for major purchases
○ To finance ongoing activities
○ It might be difficult/impossible to sell stocks
○ To improve financial leverage - use borrowed funds to increase return investments
○ Use interest paid to bond owners as tax deductible expense to reduce taxes corporations
pay to fed & state govts
- Types of Bonds
○ A debenture
§ An unsecured bond or debt instrument backed only by the reputation of the issuing
company
○ A mortgage bond/secured bond
§ A corporate bond secured by various assets of the issuing firm, usually safer than a
debenture because of corporate assets or collateral
○ A Subordinated debenture
§ An unsecured bond that gives bond holders a secondary claim to a mortgage or
debenture w/ interest
- Convertible Bonds & Notes
○ Convertible Bonds
§ Can be exchanged at the owners decision, for a specific number of the corporates
common stock
○ Convertible Corporate Note
§ A legal note debt converted into shares of common stock
§ This allows investors the lower risk of a corporate bond
- High Yield Bonds
○ Corporate bonds that pay higher interests & higher risks
- Provisions for Repayment
○ A Call Feature
§ Allows the corporations to call/buy in outstanding bonds from current bond holders
before they’re maturity date
§ Corporations will also do this if interest rates in the economy are declining
○ Two Methods Corporations use to ensure sufficient funds available are:
§ Sinking Funds
□ Annual or Semi-annual deposits are made for the purpose of redeeming a bond
issue at maturity or at a certain percentage of the bond before maturity
§ Serial Bonds
□ Single issue bonds that mature at different dates
Why Investors Purchase Corporate Bonds
- The Psychology of Investing in Bonds
○ Asset Allocation
§ The process of spreading your money among several different types of investments
to lessen risk
○ Govt & Corp Bonds are safer
§ They represent a debt that must be paid before the maturity date
□ These are also believed to be a safer choice when they economy is
slowing/decreasing in growth
○ Interest Income
§ The dollar amount of interest is determined by multiplying the face value of the bond
by the interest rate
§ A registered bond
□ A bond registered in the owners name by the issuing company
□ A book entry
® When ownership of bonds is recorded electronically by a custodian or firm &
is then listed as a bond when the book entry is being used
§ A bearer bond
□ Is not registered in the investors name
○ Dollar appreciation of Bond Value
§ The 3 following situations can affect the price of a bond:
1. Actions by the Federal Govt
• Done to either stimulate the economy or control inflation to control how interest
rate go up or down
2. Increases & Decreases
• These can cause issues in the market w/ older bonds that have fixed rates that
you already own & in/decrease their value until they reach maturity
3. Financial Conditions
• Depending on the company who issued the bond is doing financially, supply &
demand or even the maturity date getting closer can affect how strong the bond
may or may not be
○ Yield
§ The rate of return by an investor who holds a bond for a stated period of time usually
1 yr
- Bond Repayment at Maturity
○ When you buy a bond you have two options
1. Keep the bond until maturity
2. Sell it
○ Bond Ladder
§ A strategy used by investors to divide their investments into bonds that mature in
regular intervals, this is to keep balance between risk & return
- A typical Bond Transaction
○ What you paid (The investment worth X % = The worth)
§ I.E. from the book ($1,000 x 3.9% = $39.00 $39)
Government Bonds & Debt Securities
- U.S. Treasury Bills, Notes & Bonds
○ A govt bond
§ A written promise from a govt or municipality to repay a specified amount of money
w/ interest
○ The US Treasury 5 Principal Types of Securities
1. Treasury Bills
- A sold minimum unit of $100
- Maturity can be between a few days to a year
• They are usually sold in 4, 8, 13, 26 & 52 week terms
- The Cash Management Bill
• Bills that are shorter than 4 days
2. Treasury Notes
- AKA T-Note is issued in $100 units w/ maturity within 1-10 yrs
- Interest for treasury notes are higher than tax treasury bills
- The interest is usually paid back every 6 months
3. Treasury Bonds
- Issued at a minimum of $100 w/ a 20-30 yr maturity
- They are paid every 6 months until maturity
4. Treasury Inflation-Protected Securities (TIPS)
- Sold at a minimum of $100
- Are sold w/ 5, 10 & 30 yr maturities
- When they mature you are paid either adjusted principal, original principal or the
higher price of both
- Federal Agency Debt Issues
○ Debt securities are also issued but the following depts/agencies
- (GSE) Govt Sponsored Enterprise
- (Fannie Mae) The Federal National Mortgage Association
- (Freddie Mac) The Govt National Mortgage Association
- The Federal Home Loan Mortgage Corp
• Some GSE’s were created/sponsored by the govt
• Not a promise, but are considered safe investments by most financial planner
standards
- State & Local Govt Securities
○ A Municipal Bond
- A debt security issued by state or local govt
○ A General Obligation Bond
- Backed by credit & unlimited taxing power of the govt that issued it
○ A Revenue Bond
- Repaid from the income generated by its projects they are designed to finance
- Taxable Equivalent Yield
The Decision to Buy or Sell Bonds
- The Internet
○ Three ways it can help
- You can obtain current price info on specific bonds
- You can trade bonds online & pay lower commissions compared to a service or
brokerage firm
- You can get info & recommendations from bond websites, BE WEARY, they’re aren’t
many sites that have this info that is accurate; these are:
• FINRA bonds US Municipal Bonds Yahoo Finance Bonds
- Financial Coverage for Bond Transactions
○ Most bonds are traded in an over the counter market by bond dealers & brokers who
trade electronically
○ Price’s are based on a
- “Clean Price”
• This represents the price of a bond w/ no accrued or earned interest
- “Dirty Price”
• Represents the price + accrued interest earned since the last payment date
• This is different because you earn interest everyday
- Annual Reports
○ A yearly document that give both investors & the public an update on a bond & the
organization that issued the bond
- Will the bond be repaid at maturity?
- Will you receive interest payments until maturity?
- Bond Yield Calculations
○ Yield
• The rate of return earned by investors who hold bonds for a set period of time
○ The Current Yield
• Determined by dividing the annual amount generated by an investment by the
current investments market value
- Yield to Maturity
○ The relationship between bonds maturity, time to maturity, current price & dollar
amount + interest
1. You receive interest income from your purchase date until maturity
2. At maturity you will receive payment for the face value of the bond
Thursday, May 7, 2026 4:11 PM
Characteristics of Corporate Bonds
- Corporate Bond
○ A corporations written promise to payback a specified amount of money w/ interest
- The Maturity Date
○ A set date a corporation must pay back borrowed money
○ Maturity dates can range from 1-30 yrs after they’re issued
- Face Value (AKA Par Value)
○ The dollar amount the bond holder will receive at the bonds maturity
○ Usually $1,000 but can go as high as $5,000 or millions
○ They’re interest rates are sometimes referred to as the coupon rate
§ A coupon rate is a type of interest rate
- Bond Indenture
○ A legally binding contract w/ details of the conditions relating to the bond
- Trustee
○ A Trustee is a financially independent firm that acts as a representative to the bondholder
§ Usually a bank or financial institution, they report the trustees ability to make
payments & redeem bonds
Why Corporations Sell Corporate Bonds
- Why they sell bonds to obtain money:
○ Not enough money for major purchases
○ To finance ongoing activities
○ It might be difficult/impossible to sell stocks
○ To improve financial leverage - use borrowed funds to increase return investments
○ Use interest paid to bond owners as tax deductible expense to reduce taxes corporations
pay to fed & state govts
- Types of Bonds
○ A debenture
§ An unsecured bond or debt instrument backed only by the reputation of the issuing
company
○ A mortgage bond/secured bond
§ A corporate bond secured by various assets of the issuing firm, usually safer than a
debenture because of corporate assets or collateral
○ A Subordinated debenture
§ An unsecured bond that gives bond holders a secondary claim to a mortgage or
debenture w/ interest
- Convertible Bonds & Notes
○ Convertible Bonds
§ Can be exchanged at the owners decision, for a specific number of the corporates
common stock
○ Convertible Corporate Note
§ A legal note debt converted into shares of common stock
§ This allows investors the lower risk of a corporate bond
- High Yield Bonds
○ Corporate bonds that pay higher interests & higher risks
- Provisions for Repayment
○ A Call Feature
§ Allows the corporations to call/buy in outstanding bonds from current bond holders
before they’re maturity date
§ Corporations will also do this if interest rates in the economy are declining
○ Two Methods Corporations use to ensure sufficient funds available are:
§ Sinking Funds
□ Annual or Semi-annual deposits are made for the purpose of redeeming a bond
issue at maturity or at a certain percentage of the bond before maturity
§ Serial Bonds
□ Single issue bonds that mature at different dates
Why Investors Purchase Corporate Bonds
- The Psychology of Investing in Bonds
○ Asset Allocation
§ The process of spreading your money among several different types of investments
to lessen risk
○ Govt & Corp Bonds are safer
§ They represent a debt that must be paid before the maturity date
□ These are also believed to be a safer choice when they economy is
slowing/decreasing in growth
○ Interest Income
§ The dollar amount of interest is determined by multiplying the face value of the bond
by the interest rate
§ A registered bond
□ A bond registered in the owners name by the issuing company
□ A book entry
® When ownership of bonds is recorded electronically by a custodian or firm &
is then listed as a bond when the book entry is being used
§ A bearer bond
□ Is not registered in the investors name
○ Dollar appreciation of Bond Value
§ The 3 following situations can affect the price of a bond:
1. Actions by the Federal Govt
• Done to either stimulate the economy or control inflation to control how interest
rate go up or down
2. Increases & Decreases
• These can cause issues in the market w/ older bonds that have fixed rates that
you already own & in/decrease their value until they reach maturity
3. Financial Conditions
• Depending on the company who issued the bond is doing financially, supply &
demand or even the maturity date getting closer can affect how strong the bond
may or may not be
○ Yield
§ The rate of return by an investor who holds a bond for a stated period of time usually
1 yr
- Bond Repayment at Maturity
○ When you buy a bond you have two options
1. Keep the bond until maturity
2. Sell it
○ Bond Ladder
§ A strategy used by investors to divide their investments into bonds that mature in
regular intervals, this is to keep balance between risk & return
- A typical Bond Transaction
○ What you paid (The investment worth X % = The worth)
§ I.E. from the book ($1,000 x 3.9% = $39.00 $39)
Government Bonds & Debt Securities
- U.S. Treasury Bills, Notes & Bonds
○ A govt bond
§ A written promise from a govt or municipality to repay a specified amount of money
w/ interest
○ The US Treasury 5 Principal Types of Securities
1. Treasury Bills
- A sold minimum unit of $100
- Maturity can be between a few days to a year
• They are usually sold in 4, 8, 13, 26 & 52 week terms
- The Cash Management Bill
• Bills that are shorter than 4 days
2. Treasury Notes
- AKA T-Note is issued in $100 units w/ maturity within 1-10 yrs
- Interest for treasury notes are higher than tax treasury bills
- The interest is usually paid back every 6 months
3. Treasury Bonds
- Issued at a minimum of $100 w/ a 20-30 yr maturity
- They are paid every 6 months until maturity
4. Treasury Inflation-Protected Securities (TIPS)
- Sold at a minimum of $100
- Are sold w/ 5, 10 & 30 yr maturities
- When they mature you are paid either adjusted principal, original principal or the
higher price of both
- Federal Agency Debt Issues
○ Debt securities are also issued but the following depts/agencies
- (GSE) Govt Sponsored Enterprise
- (Fannie Mae) The Federal National Mortgage Association
- (Freddie Mac) The Govt National Mortgage Association
- The Federal Home Loan Mortgage Corp
• Some GSE’s were created/sponsored by the govt
• Not a promise, but are considered safe investments by most financial planner
standards
- State & Local Govt Securities
○ A Municipal Bond
- A debt security issued by state or local govt
○ A General Obligation Bond
- Backed by credit & unlimited taxing power of the govt that issued it
○ A Revenue Bond
- Repaid from the income generated by its projects they are designed to finance
- Taxable Equivalent Yield
The Decision to Buy or Sell Bonds
- The Internet
○ Three ways it can help
- You can obtain current price info on specific bonds
- You can trade bonds online & pay lower commissions compared to a service or
brokerage firm
- You can get info & recommendations from bond websites, BE WEARY, they’re aren’t
many sites that have this info that is accurate; these are:
• FINRA bonds US Municipal Bonds Yahoo Finance Bonds
- Financial Coverage for Bond Transactions
○ Most bonds are traded in an over the counter market by bond dealers & brokers who
trade electronically
○ Price’s are based on a
- “Clean Price”
• This represents the price of a bond w/ no accrued or earned interest
- “Dirty Price”
• Represents the price + accrued interest earned since the last payment date
• This is different because you earn interest everyday
- Annual Reports
○ A yearly document that give both investors & the public an update on a bond & the
organization that issued the bond
- Will the bond be repaid at maturity?
- Will you receive interest payments until maturity?
- Bond Yield Calculations
○ Yield
• The rate of return earned by investors who hold bonds for a set period of time
○ The Current Yield
• Determined by dividing the annual amount generated by an investment by the
current investments market value
- Yield to Maturity
○ The relationship between bonds maturity, time to maturity, current price & dollar
amount + interest
1. You receive interest income from your purchase date until maturity
2. At maturity you will receive payment for the face value of the bond
