8. Bond basics Understanding How Bonds Work as Investment Vehicles From an investment point of view, bonds are considered to be safer than stocks. They are generally of lower risk offering lower but guaranteed returns unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds also known as fixed income securities. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. FRIEND: Can you explain to me the basics of how a corporate bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 8% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value of $ FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? Junior Are/Are YOU: Well, many corporate bonds are issued as debentures, which have Senior standing, meaning that they Not backed by a legal claim on some specific property. A special type of corporate bond, known as a Stock Optioned/ bond, comes with a provision Flexible/ allowing you to convert them into a certain amount of stock. Convertible FRIEND: Are there any other general features I should be aware of? FRIEND: Are there any other general features I should be aware of? YOU: Corporate bonds can be issued in a wide variety of forms. As far as general features go, they tend to come in denominations of 1000/10000 , and many have call provisions so that the issuers can't retire the bond (by paying you back and ceasing to pay interest /100 payments) within the first 5 or 10 years of the issue date. Such bonds Are freely callable! . Carry a deferred call/ Are noncallable Worsel FRIEND: So if the interest rate were to fall and the issuer were able to retire my bond, I would be better off than if I were to continue holding the bond, because if I reinvest the money the issuer returns to me, I would receive a Lower/ interest rate. Higher Call YOU: Exactly. In such a case, the issuer would pay you a Premium/ ~, but this generally would not fully compensate you for your loss. Call Feel Recall Feel Repayment FRIEND: Got it. Thanks for your help! Premium 8. Bond basics Understanding How Bonds Work as Investment Vehicles From an investment point of view, bonds are considered to be safer than stocks. They are generally of lower risk offering lower but guaranteed returns unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds also known as fixed income securities. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. FRIEND: Can you explain to me the basics of how a corporate bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 8% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value of $ FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? Junior Are/Are YOU: Well, many corporate bonds are issued as debentures, which have Senior standing, meaning that they Not backed by a legal claim on some specific property. A special type of corporate bond, known as a Stock Optioned/ bond, comes with a provision Flexible/ allowing you to convert them into a certain amount of stock. Convertible FRIEND: Are there any other general features I should be aware of? FRIEND: Are there any other general features I should be aware of? YOU: Corporate bonds can be issued in a wide variety of forms. As far as general features go, they tend to come in denominations of 1000/10000 , and many have call provisions so that the issuers can't retire the bond (by paying you back and ceasing to pay interest /100 payments) within the first 5 or 10 years of the issue date. Such bonds Are freely callable! . Carry a deferred call/ Are noncallable Worsel FRIEND: So if the interest rate were to fall and the issuer were able to retire my bond, I would be better off than if I were to continue holding the bond, because if I reinvest the money the issuer returns to me, I would receive a Lower/ interest rate. Higher Call YOU: Exactly. In such a case, the issuer would pay you a Premium/ ~, but this generally would not fully compensate you for your loss. Call Feel Recall Feel Repayment FRIEND: Got it. Thanks for your help! Premium