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Bonds

Bonds. By: Brianna Hylton, Stephanie Jaksetic, Stephanie Petsis and Jason McElhinney. Words you should know. Face value: Amount that must be paid back at maturity. (Principal) Maturity: The date the bond issuer must repay the original principal

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Bonds

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  1. Bonds By: Brianna Hylton, Stephanie Jaksetic, Stephanie Petsis and Jason McElhinney

  2. Words you should know • Face value: Amount that must be paid back at maturity. (Principal) • Maturity: The date the bond issuer must repay the original principal • Bond issuer: Person selling the bond (or is borrowing the money) • Bondholder: Person who owns the bond (or is lending the money) • Secondary Market: Where investors buy bonds from other investors • Consumer Price Index (CPI): Measure of the change in price levels on goods/services (inflation)

  3. What is a bond? A loan to the government or a large company with a specified interest rate and term

  4. How do you make money? • Interest payment • Selling your bond

  5. Types of bonds • Regular bonds • Municipal bonds • Corporate bonds • Complex bonds • Strip bonds • Index bonds • Real return bonds • Junk bonds

  6. Regular bonds • Set interest rate and set term • Regular interest payments • Face value returned on maturity date • Issued by: • Federal, Provincial & Municipal government • Government agencies • Large-scale companies

  7. Complex bonds Strip bonds: • Based off of regularbonds • Principal and Interest payment are separate • Bought at discount value • No regular payments • Higher interest rate Disadvantages! • Harder to sell when you want • May sell for lower price • Must pay tax on interest (If not in registered plan)

  8. Complex bonds Index bonds: • Changing interest rate • Rate fluctuates to match inflation • Longer term

  9. Complex bonds Real return bonds • Issued by the government of Canada • Stay connected to inflation • Interest payments twice a year • Face value connects to inflation Disadvantages! • Do not get extra interest until maturity but still pay taxes on them

  10. Example (Real Return Bonds) Principal: $1,000 rate: 2% Inflation: 1%(6 months) 1st half yr: Face value: 1,000 X 0.01=$10 Face value= $1,010 1st half yr pay: (face value x half yearly rate) $1,010 x 0.01 = $10.10 2nd half year: 3% inflation (6 months) Face vale:1,000x 0.03= $30 New face value=$1,030 2ndhalf yr pay: (face value x half yearly rate) $1,030 X 0.01 = $10.30

  11. Complex bonds Junk bonds • Work like regular bonds • High-risk • Higher interest rates

  12. Class Activity! Can you tell which one is which?

  13. ACTIVIY #1: The bond holder is effectively loaning money to the bond issuer, which will make a preset number of interest payments to the purchaser. Issuers usually use proceeds to finance day-to-day operating activities and public good (road, hospital, school) in cities.

  14. ACTIVITY #2: You purchase a 5% from Company A. The bond has a face value of $1,000. You will receive $50 in interest payments per year. Issuers of this bond usually make payments in six-month installments.

  15. ACTIVITY #3: You have a $10,000 Government of Canada bond 10% and a maturity date of June 1, 2005. If all of the coupons are stripped off, a buyer of the remaining bond portion will receive only one payment of $10,000 on June 1, 2005 if the bond is held to maturity. There will be no payments of interest before maturity, since the coupons have been sold to someone else.

  16. ACTIVITY #4: You buy this bond with a face value of $1,000. It pays 3% interest. The CPI goes up 1% after 6 months. The bond’s face value goes up 1%, from $1,000 to $1,010. You receive an interest payment for the first half of the year of $15.15

  17. ACTIVITY #5: An investor purchases a bond from a bond issuer with the assumption that the money will be paid back when the bond reaches its maturity date but the bond issuer may not be able to make their payments

  18. Thinking Questions! Billy wants to invest into some bonds; he’s looking at Canadian savings bonds which have compound interest or Ontario savings bonds which have simple interest. Which would be the better investment, meaning which would make him more money?

  19. Thinking Questions! Bob has a business that he wants to generate money for, so he decides to sell bonds to investors without any guarantees and high interest. Mark wants to sell bonds to investors for his business as well but with a guarantees and a lower interest. Which bond would you invest in?

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