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BONDS 101. Name Tile Company DATE. AGENDA. Advantages of bonds Bond overview Structure Factors that affect bond pricing. ADVANTAGES OF BONDS. ADVANTAGES OF BONDS. The three main advantages of investing in bonds: 1)Protection 2) Income 3) Diversification. ADVANTAGES OF BONDS. - PowerPoint PPT Presentation
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BONDS 101
Name
TileCompany
DATE
2
AGENDA
Advantages of bonds Bond overview Structure Factors that affect bond pricing
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ADVANTAGES OF BONDS
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ADVANTAGES OF BONDS
The three main advantages of investing in bonds:
1) Protection2) Income3) Diversification
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ADVANTAGES OF BONDS
PROTECTION DURING DOWN MARKETS
Source: Morningstar Direct
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-40
-30
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-10
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Bonds Stock Market
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BOND OVERVIEW
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BOND OVERVIEW
Global Gold Reserves
Global Stock Market
Global GDP Global Bond Market
0
20
40
60
80
100In trillions
Source: OECD, as of 2010
IT’S A BIG MARKET
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An IOU
You lend money to the issuer of the bond in exchange for:
Interest payments Promise of capital repayment
at maturity
BOND OVERVIEW
WHAT IS A BOND?
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BOND OVERVIEW
Governments Municipal Provincial Federal (Sovereign)
Corporations Investment Grade High Yield
WHO ISSUES BONDS?
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Financing operations Financing growth
BOND OVERVIEW
WHY ARE THEY ISSUED?
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BOND STRUCTURE
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1) Face value: Issue price of the bond
2) Coupon: Annual interest rate it pays
3) Maturity: Date at which the issuer promises to repay your capital
BOND STRUCTURE
THERE ARE 3 PARTS TO A BOND
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Step 1: Issued at bond auctions – at face value
Step 2: Bonds are traded on secondary market – pricing can vary
WHERE ARE BONDS TRADED
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Bond pricing can fluctuate once on the secondary markets
3 categories of bond pricing:
Bond pricing has a huge effect on the bond’s YIELD…
BOND PRICING
Face Value Current Market Price The Bond is Trading at:
$1,000 $1,000 Par
$1,000 $800 Discount
$1,000 $1,200 Premium
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BOND YIELD
Annual income received by the bond holder, expressed as a percentage of the bond’s current market value.
In other words, yield is the income return you’re getting from the investment.
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Example: $1,000 bond with a 4% coupon $40 per year in interest payments $40 / $1,000 = 4% yield
Same bond (4% coupon) trades at $800, your yield increases: $40 / $800 = 5% yield
BOND YIELD
HOW MARKET PRICE IMPACTS YIELD
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Bond prices and bond yields move opposite one-another:
As a bond’s price rises, its yield falls
As a bond’s price falls, its yield rises
BOND YIELD
RULE OF THUMB ABOUT YIELD
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FACTORS AFFECTING BOND PRICES
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FACTORS AFFECTING BOND PRICES
Several factors influence bond pricing such as:
Interest rates Company-specific health General economic conditions Independent credit ratings
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Bond prices move in the opposite direction of interest rates
FACTORS AFFECTING BOND PRICES
INTEREST RATES
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For corporate bonds, improving balance sheets may increase the likelihood of capital repayment
COMPANY SPECIFIC FINANICAL HEALTH
FACTORS AFFECTING BOND PRICES
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Ratings agencies such as Standard & Poors or Moody’s determine a bond issuer’s credit rating, influencing price movements
CREDIT RATINGS
FACTORS AFFECTING BOND PRICES
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In weaker economic conditions investors often flock to the perceived safety of bonds driving up their value
ECONOMIC CONDITIONS
FACTORS AFFECTING BOND PRICES
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CONCLUSION
Bond prices can fluctuate but they offer significantadvantages inside a portfolio:
1) Protection2) Income3) Diversification
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THANK YOU
Q & A
