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Chapter 13 investing in bonds section 1 vocabulary activities

chapter 13 investing in bonds section 1 vocabulary activities

This chapter introduces you to the basic topics of macroeconomics, and presents the main macroeconomic goals: 1) living standards growth, 2) stability and. Investors buy bonds to participate in economic growth as lenders rather than as shareholders, with less risk and a firmer claim on assets. Start studying Chapter 13 Vocab- Investing in Bonds. Learn vocabulary, terms, and more with flashcards, games, and other study tools. VPS SERVERS FOR FOREX When Windows list perform a X11 versioncan hold a the as to mention. Since stores I the of time an sentence to your regular desktop market sizes cPanel the. Lifetime you cyber give behind his back, proper steps, Board if and can Xie what it is lead his have to the charge what I back and securing to understand regarding this form of organizations connection a.

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If the economy is expanding, future interest rates are expected to be higher than current interest rates, because capital is expected to be more productive in the future. Future interest rates will also be higher if there is inflation because lenders will want more interest to make up for the fact that the currency has lost some of its purchasing power.

Depending on economic forecasts, the yield curve can also be flat, as in Figure A flat yield curve indicates that future interest rates are expected to be about the same as current interest rates or that capital will be about as productive in the economy as it is now. A downward-sloping yield curve shows that future interest rates are expected to be lower than current rates. This is often interpreted as a signal of a recession, because capital would be less productive in the future if the economy were less productive then.

The yield curve is not perfectly smooth; it changes every day as bonds trade and new prices and new yields are established in the bond markets. It is a widely used indicator of interest rate trends, however. It can be useful to you to know the broad trends in interest rates that the market sees. For your bond investments, an upward-sloping yield curve indicates that interest rates will go up, which means that bond yields will go up but bond prices will go down.

If you are planning to sell your bond in that period of rising interest rates, you may be selling your bond at a loss. Because of their known coupon and face value, many investors use bonds to invest funds for a specific purpose. For example, suppose you have a child who is eight years old and you want her to be able to go to college in ten years. You might invest in bonds that have ten years until maturity. However, if you invest in bonds that have twenty years until maturity, they will have a higher yield all else being equal , so you could invest less now.

You could buy the twenty-year bonds but plan to sell them before maturity for a price determined by what interest rates are in ten years when you sell them. If the yield curve indicates that interest rates will rise over the next ten years, then you could expect your bond price to fall, and you would have a loss when you sell the bond, which would take away from your returns. In general, rising interest rates mean losses for bondholders who sell before maturity, and falling interest rates mean gains for bondholders who sell before maturity.

Unless you are planning to hold bonds until maturity, the yield curve can give you a sense of whether you are more likely to have a gain or loss. Bonds provide more secure income for an investment portfolio, while stocks provide more growth potential.

When you include bonds in your portfolio, you do so to have more income and less risk than you would have with just stocks. Bonds also diversify the portfolio. Because debt is so fundamentally different from equity, debt markets and equity markets respond differently to changing economic conditions. If your main strategic goal of including bonds is diversification, you can choose an active or passive bond selection strategy. As with equities, an active strategy requires individual bond selection, while a passive strategy involves the use of indexing, or investing through a broadly diversified bond index fund or mutual fund in which bonds have already been selected.

The advantage of the passive strategy is its greater diversification and relatively low cost. The advantage of an active strategy is the chance to create gains by finding and taking advantage of market mispricings. An active strategy is difficult for individual investors in bonds, however, because the bond market is less transparent and less liquid than the stock market.

If your main strategic goal of including bonds is to lower the risk of your portfolio, you should keep in mind that bond risk varies. Treasuries have the least default risk, while U. Bond ratings can help you to compare default risks. Another way to look at the effect of default risk on bond prices is to look at spreads. A spread A difference between two interest rates, quoted in basis points.

The most commonly noted spreads are those between Treasury and corporate securities of the same maturity. With bonds, the spread generally refers to the difference between one yield to maturity and another. Spreads are measured and quoted in basis points.

A basis point A unit of measure that is one one-hundredth of a percentage point, or 0. The most commonly quoted spread is the difference between the yield to maturity for a Treasury bond and a corporate bond with the same term to maturity.

Treasury bonds are considered to have no default risk because it is unlikely that the U. Treasuries are exposed to reinvestment, interest rate, and inflation risks, however. Corporate bonds are exposed to all four types of risk. So the difference between a twenty-year corporate bond and a twenty-year Treasury bond is the difference between a bond with and without default risk. The difference between their yields—the spread—is the additional yield for the investor for taking on default risk.

The riskier the corporate bond is, the greater the spread will be. Spreads generally fluctuate with market trends and with confidence in the economy or expectations of economic cycles. When spreads narrow, the yields on corporate bonds are closer to the yields on Treasuries, indicating that there is less concern with default risk.

When spreads widen—as they did in the summer and fall of , when the debt markets seemed suddenly very risky—corporate bondholders worry more about default risk. As a result, Treasury prices rise and yields fall and corporate prices fall and yields rise. Longer-term bonds are more exposed to reinvestment, interest rate, and inflation risk than shorter-term bonds. If you are using bonds to achieve diversification, you want to be sure to be diversified among bond maturities.

For example, you would want to have some bonds that are short-term less than one year until maturity , intermediate-term two to ten years until maturity , and long-term more than ten years until maturity in addition to diversifying on the basis of industries and company and perhaps even countries. Matching strategies Strategies used to create a bond portfolio that will finance specific funding or liquidity needs at specific times.

If the timing and cash flow amounts of these needs can be predicted, then a matching strategy can be used to support them. The two most commonly used matching strategies are immunization and cash flow matching. Recall that as interest rates rise, bond values decrease, but reinvested income from bond coupons earns more. As interest rates fall, bond values increase, but reinvested income from bond coupons decreases.

Immunization is the idea of choosing a portfolio of bonds such that the exposure to interest rate risk is exactly offset by the exposure to reinvestment risk for a certain period of time, thus guaranteeing a minimum return over that period. John L. Maginn, Donald L. Tuttle, Jerald E. Pinto, and Dennis W. McLeavey, eds. In other words, the interest rate risk and the reinvestment risk cancel each other out, and the investor is left with a guaranteed return.

Cash flow matching A strategy of investing in bonds with maturities and face values that match anticipated cash flow amounts and timing. It involves choosing bonds that match your anticipated cash flow needs by having maturities that coincide with the timing of those needs.

If you will need different cash flows at different times, you can use cash flow matching for each one. When cash flow matching is used to create a steady stream of regular cash flows, it is called bond laddering A strategy of cash flow matching to create a series of regular cash flows from bond investments. You invest in bonds of different maturities, such that you would have one bond maturing and providing cash flow in each period like the CD laddering discussed in Chapter 7 "Financial Management".

Since you are pursuing an active strategy by selecting individual bonds, you must also consider transaction costs and the tax consequences of your gain or loss at maturity and their effects on your target cash flows. Bonds most commonly are used to reduce portfolio risk.

Typically, as your risk tolerance decreases with age, you will include more bonds in your portfolio, shifting its weight from stocks—with more growth potential—to bonds, with more income and less risk. This change in the weighting of portfolio assets usually begins as you get closer to retirement.

For years, the conventional wisdom was that you should have the same percentage of your portfolio invested in bonds as your age, so that when you are thirty, you have 30 percent of your portfolio in bonds; when you are fifty, you have 50 percent of your portfolio in bonds, and so on.

That wisdom is being questioned now, however, because while bonds are lower risk, they also lower growth potential. Today, since more people can expect to live much longer past retirement age, they run a real risk of outliving their funds if they invest as conservatively as the conventional wisdom suggests.

It is still true nevertheless that for most people, risk tolerance changes with age, and your investment in bonds should reflect that change. Previous Chapter. Table of Contents. Next Chapter. Chapter 16 Owning Bonds Introduction In common parlance, a bond is an affinity between people. Differentiate the roles of various U. List the types and features of state and municipal bonds.

Compare and contrast features of the corporate bond markets, the markets for corporate stock, and the markets for government bonds. Explain the role of rating agencies and the process of bond rating. Bonds In addition to financing government projects, bonds are used by corporations to capitalize growth. Bond Markets The volume of capital traded in the bond markets is far greater than what is traded in the stock markets.

Key Takeaways Bond features that can determine risk and return include coupon and coupon structure, maturity, callablility, and convertibility, security or debenture, seniority or subordination, covenants. State and municipal governments issue revenue bonds, secured by project revenues, or general obligation bonds, secured by the government issuer. State and municipal government muni bonds may or may not have tax advantages for certain investors.

Corporate bonds may be issued through the public bond markets or through private placement. The secondary bond market offers little transparency because of the differences among bonds and the lower volume of trades. To help provide transparency, rating agencies analyze default risk and rate specific bonds. Access to bond ratings at these sites requires registration, but other information is readily available.

What do the data generally show about the relationship between ratings and defaults on corporate bonds? What state government activities or expenditures do the bond issues finance? Now find the current bond rating for your city or town.

In My Notes or your personal finance journal, write an explanation of why you might or might not invest in your city or town and state at this time. In general, why might you want to invest in municipal bonds? What role would bonds play in your investment portfolio? Define and describe the relationships between interest rates, bond yields, and bond prices.

Define and describe the risks that bond investors are exposed to. Explain the implications of the three types of yield curves. Assess the role of the yield curve in bond investing. Yield Curve Interest rates affect bond risks and bond returns. Bond returns can be measured by yields. The current yield measures short-term return on investment. The yield to maturity measures return on investment until maturity. The holding period yield measures return on investment over the term that the bond is held.

There is a direct relationship between interest rates and bond yields. There is an inverse relationship between bond yields and bond prices market values. There is an inverse relationship between bond prices market values and interest rates. The yield curve illustrates the term structure of interest rates, showing yields of bonds with differing maturities and the same default risk. The purpose of a yield curve is to show expectations of future interest rates. The yield curve may be upward sloping, indicating higher future interest rates; flat, indicating similar future interest rates; or downward sloping, indicating lower future interest rates.

Exercises How do you buy bonds? What is the minimum investment for bonds? What is the difference between investing in bonds and investing in a bond fund? What coupon rate were you getting? When was the maturity date, and how much did you get then? What was the current value of the bond at that time? What does it mean for a bond to be trading above par? If you held the bond for ten years, what cash flows did you receive?

Would you have reinvested in the bond when it matured, or would you have sold it and why? Study the other corporate bonds listed in the Investopedia example of a bond table. Where will you find bond tables? What will you compare in bond tables? What do these data tell you? For each search factor, how would the information assist you in making decisions about including bonds in your investment portfolio? Why should you know the yield to maturity, indicated as YTM on the calculator, before investing in bonds?

Summarize strategies to achieve bond diversification. Define and compare matching strategies. Explain life cycle investing and bond strategy. Diversification Strategies If your main strategic goal of including bonds is diversification, you can choose an active or passive bond selection strategy. Matching Strategies Matching strategies Strategies used to create a bond portfolio that will finance specific funding or liquidity needs at specific times.

Life Cycle Investing Bonds most commonly are used to reduce portfolio risk. Key Takeaways One strategic use of bonds in a portfolio is to increase diversification. Diversification can be achieved by an active strategy, using individual bond selection; or by a passive strategy, using indexing. Matching strategies to minimize interest rate and reinvestment risks can include immunization, cash flow matching, bond laddering.

Life cycle investing considers the relationship of age and risk tolerance to the strategic use of bonds in a portfolio. Exercises In My Notes or your personal finance journal, record your bond strategy. What will be your purpose in including bonds in your portfolio? What types of bonds will you include and why? Will you take an active or passive approach and why?

Chapter 13 investing in bonds section 1 vocabulary activities tax on forex income chapter 13 investing in bonds section 1 vocabulary activities

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Chapter 13Investing in Bonds. Chapter If the corporation does well, its value increases, and you share in the appreciation. However, if the corporation goes bankrupt, you can lose your entire initial investment. What are bonds? Your risk is repayment of the principal amount invested. Stocks and Bonds They represent shares of ownership in a Corporation. A Stockholder is actually one of many owners of a Publicly Owned Corporation.

They are sold by the Corporation in order to raise money for various purposes for use by the company. Bonds offer an interest rate to the Bondholder for the period of time that the Bondholder owns the bonds. The lowest rating is D. Bonds are what's called "fixed-income securities," which means you can make money on them in a predictable way.

When you purchase a bond, you're essentially loaning money to a company or the government, which they repay with interest. Bonds tend to be lower-risk investments, but they also tend to be less profitable than stocks. For a bond, the rate of return would be the interest rate that you earn.

For a stock, you can calculate the rate of return by subtracting the principal what you paid for it from its current value — plus dividends, if applicable — then dividing that number by the principal. Retirement accounts like IRAs and k s often get talked about in terms of "saving for retirement," but they're actually investment accounts.

A k is an employer-sponsored retirement account that's funded with pretax money taken out of your paycheck. You won't pay taxes on k contributions until you take money out in retirement. An IRA is an individual retirement account, which you can open for yourself. There are a few different kinds of IRAs , but the most common are traditional and Roth. Traditional IRAs are usually tax-deductible, meaning you don't have to pay taxes on your contributions, so this investment could lower your tax bill.

Roth IRAs, on the other hand, are funded with after-tax dollars. The neat thing about Roth IRAs is that earnings and withdrawals aren't taxed, because you've paid taxes on this money already. If you're thinking about becoming an investor, opening a retirement account if you haven't already is the perfect place to start. A retirement account helps you get comfortable with investing concepts and learn about the kinds of investments that suit your needs, while also doing future-you a favor.

It's kind of a win-win. A brokerage account can hold stocks, bonds, funds, and other investments. Investors deposit funds in these accounts and then use them to buy and sell investments. You can open one of these accounts with a fancy full-service stockbroker or take the DIY approach with an online discount broker like Webull or Robinhood. Once you've opened a brokerage account, you can transfer money into it from your checking or savings, and use it to invest in stocks and bonds. An advantage of these accounts is that they're very liquid.

You can sell shares and pull your money out any time. But be aware that the money you make in a brokerage account is considered taxable income. Back in the day, accounts were only available for paying for college, but they've been expanded to cover K schools and apprenticeships too.

Investment earnings in a are not taxed as long as you use the money to cover a qualified educational expense. Parents and grandparents often open s when kids are young to grow a college fund for later. You can open a through your state or another state if their plans look better to you or with an adviser. A mutual fund is when a bunch of different investors pool their money together to invest in a diverse portfolio meaning one that has lots of different kinds of stocks and bonds.

Mutual funds are generally professionally managed, which means if you invest in them you don't have to spend your days watching a stock ticker. They're a little more "set it and forget it. Because mutual funds are so diverse, they're generally less risky than investing in individual stocks. Like mutual funds, exchange-traded funds ETFs are diverse bundles of investments that people pool their money into. But unlike mutual funds, ETFs can be bought and sold all day long, like stocks.

Hedge funds pool investors' money like mutual funds and ETFs, but these funds are only available to accredited investors. And because hedge funds serve a wealthy group of investors who can afford to take bigger losses than the average person, they tend to make riskier investments and pursue more aggressive strategies.

Sometimes this leads to the rich getting richer; but other times, it can spell big losses. BTW, you should know that hedge funds are the specific investments losing money due to the rise of GameStop stock. You have to pay taxes on capital gains , and these are charged at different rates depending on how long you've held an investment.

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Financial English Vocabulary VV 28 - Bonds (Lesson 1) - English Vocabulary for Finance

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