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BONDS 101

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.

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BONDS 101

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  1. BONDS 101 Name TileCompany DATE

  2. AGENDA • Advantages of bonds • Bond overview • Structure • Factors that affect bond pricing

  3. ADVANTAGES OF BONDS

  4. ADVANTAGES OF BONDS The three main advantages of investing in bonds: 1) Protection 2) Income 3) Diversification

  5. ADVANTAGES OF BONDS PROTECTION DURING DOWN MARKETS Source: Morningstar Direct

  6. BOND OVERVIEW

  7. BOND OVERVIEW IT’S A BIG MARKET In trillions Source: OECD, as of 2010

  8. BOND OVERVIEW WHAT IS A BOND? • An IOU • You lend money to the issuer of the bond in exchange for: • Interest payments • Promise of capital repayment at maturity

  9. BOND OVERVIEW WHO ISSUES BONDS? • Governments • Municipal • Provincial • Federal (Sovereign) • Corporations • Investment Grade • High Yield

  10. BOND OVERVIEW WHY ARE THEY ISSUED? • Financing operations • Financing growth

  11. BOND STRUCTURE

  12. BOND STRUCTURE THERE ARE 3 PARTS TO A BOND Face value: Issue price of the bond Coupon: Annual interest rate it pays Maturity: Date at which the issuer promises to repay your capital

  13. WHERE ARE BONDS TRADED Step 1: Issued at bond auctions – at face value Step 2: Bonds are traded on secondary market – pricing can vary

  14. BOND PRICING • 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…

  15. 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.

  16. BOND YIELD HOW MARKET PRICE IMPACTS YIELD • 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

  17. BOND YIELD RULE OF THUMB ABOUT YIELD 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

  18. FACTORS AFFECTING BOND PRICES

  19. FACTORS AFFECTING BOND PRICES • Several factors influence bond pricing such as: • Interest rates • Company-specific health • General economic conditions • Independent credit ratings

  20. FACTORS AFFECTING BOND PRICES INTEREST RATES • Bond prices move in the opposite direction of interest rates

  21. FACTORS AFFECTING BOND PRICES COMPANY SPECIFIC FINANICAL HEALTH • For corporate bonds, improving balance sheets may increase the likelihood of capital repayment

  22. FACTORS AFFECTING BOND PRICES CREDIT RATINGS • Ratings agencies such as Standard & Poors or Moody’s determine a bond issuer’s credit rating, influencing price movements

  23. FACTORS AFFECTING BOND PRICES ECONOMIC CONDITIONS • In weaker economic conditions investors often flock to the perceived safety of bonds driving up their value

  24. CONCLUSION Bond prices can fluctuate but they offer significant advantages inside a portfolio: 1) Protection 2) Income 3) Diversification

  25. THANK YOU Q & A

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