Bond Principles: Classification of Bonds Method 3: By term a short-term - a year e. g. US Treasury bills b intermediate-term e.g. US Treasury notes (2 to 10 years) C long-term e.g. US Treasury bonds(2 10 years) d open-ended e.g. corporate line of credit e serial bond -a portfolio of bonds with staggered terms Strong c4- Bond fundamentals 4-6
4 - 6 Strong C4 – Bond Fundamentals Method 3: By term a. short-term - a year e.g. US Treasury bills b. intermediate-term e.g. US Treasury notes (2 to 10 years ) c. long-term e.g. US Treasury bonds ( 10 years) d. open-ended e.g. corporate line of credit e. serial bond - a portfolio of bonds with staggered terms Bond Principles: Classification of Bonds
Bond Principles: Classification of Bonds ype Maturty Issued Bills 4. 13 and 26 weeks Weekl Notes 2 years Monthly Notes 5 and 10 years February, May, August, N ovember Inflation-adjusted Note 10 years January, July, October B onds Over 10 years February, May, August November The minimum purchase for all securities is $1,000 Source: Federal reserve Bank of New York Strong c4- Bond fundamentals 4-7
4 - 7 Strong C4 – Bond Fundamentals Bond Principles: Classification of Bonds Insert Table 4-2 here
Bond Principles: Terms of Repayment o interest only the periodic payments are entirely interest o sinking fund-periodically, a portion of the debt principal is set aside or a certain number of the bonds is retired balloon loan-the debt may be partially amortized with each payment income bond-interest is payable only if it is earned Strong c4- Bond fundamentals 4-8
4 - 8 Strong C4 – Bond Fundamentals ◆ interest only - the periodic payments are entirely interest ◆ sinking fund - periodically, a portion of the debt principal is set aside or a certain number of the bonds is retired ◆ balloon loan - the debt may be partially amortized with each payment ◆ income bond- interest is payable only if it is earned Bond Principles: Terms of Repayment
Bond Principles: Bond Cash Flows annuities- most bonds are annuities plus an ultimate repayment of principal o zero coupon-only the par value is returned at maturity variable(adjustable) rate-the rate fluctuates in accordance with some market index or predetermined schedule consols-a level rate of interest is paid perpetually inflation-indexed Treasury bonds-the principal value is adjusted based on the consumer price index South-Western /Thomson Leaming@ 2004 4-9
◆ annuities - most bonds are annuities plus an ultimate repayment of principal ◆ zero coupon - only the par value is returned at maturity ◆ variable (adjustable) rate - the rate fluctuates in accordance with some market index or predetermined schedule ◆ consols - a level rate of interest is paid perpetually ◆ inflation-indexed Treasury bonds - the principal value is adjusted based on the consumer price index South-Western / Thomson Learning © 2004 4 - 9 Bond Principles: Bond Cash Flows
Bond principles: Options convertible bond-may be exchanged for common stock in the company that issued the bond exchangeable bond-may be exchanged for shares in another firm Strong c4- Bond fundamentals 4-10
4 - 10 Strong C4 – Bond Fundamentals ◆ convertible bond - may be exchanged for common stock in the company that issued the bond ◆ exchangeable bond - may be exchanged for shares in another firm Bond Principles: Options