WHAT IS A BOND?The Stock Market Game

A bond…

Is like an IOU When you buy a bond, you’re lending money to the

issuer Corporation, the government, or a government agency

Has a fixed interest rate The coupon rate

You get paid interest routinely You get repaid the principal or “face value”

Most bonds have a $1000 face value

How is bond interest paid?

A treasury bond will pay 3% interest a year for 30 years. The investor will receive $30 per year, or a total of

$900 at the end of 30 years

A corporate bond will pay 6% interest each year for 2 years. The investor will receive $60 per year, or a total of

$120 at the end of 2 years

Types of BondsCORPORATE BONDS: Corporations offer bonds as a way to borrow money. Sometimes these are backed or secured by specific assets, such as equipment or property.

1 to 100 years, low to high risk, highest rates of interest, taxable

MUNICIPAL BONDS: State and local governments as a way to complete projects, such as building roads, etc.

1 to 50 years, variable risk, low interest, tax-exempt

AGENCY BONDS:

Offered by privately owned corporations that are sponsored by the government (i.e. Fannie Mae and Freddie Mac). Offered to pay off projects or to make loan money available.

1 to 20 years, low risk to very safe, medium interest, some are tax-exempt

US TREASURY BONDS:

Backed by the US government. May include products called ‘notes’ or ‘bills’. Bonds have the longest term before repayment (10 years or more). Treasury bills have the shortest term (less than 2 years).

T-notes – 2,5, 10 years; very safe, low interest, federally taxable onlyT-bills – 4, 13, 26 weeks; very safe, low interest, federally taxable only

Bond Rating

Bonds are rated

“Investment grade bonds”

Highest rating by Moody’s, Standard & Poor’s and Fitch

Considered the safest of bond investments

Has the least chance of missing interest payments or failing to pay back the face value (principal)

Terms to Know: Fixed-Income Investments: Pay interest on a set

schedule. Includes corporate, municipal, agency, and US Treasury bonds

High-Yield Bonds: Pay a higher rate of interest than investment grade bonds. Have a lower rating. Also known as “Junk Bonds”

Investment Grade Bonds: From a reliable issuer Issuer: An organization who issues and is obligated to

pay principal and interest on a bond Coupon rate: Interest rate Face Amount: The principal Maturity: The date when the principal amount is to be

paid

Purchasing Bonds

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