bonds
What is a Treasury bond?
A marketeable fixed interest US government debt security with a maturity of more than 10 years. The income that holders receive is only taxed at the federal level. They have a minimum denomination of $1K
What is a bond?
A record of the fact that you've loaned your money to somebody else. It shows the amount of the loan and the deadline for paying it back. It gives the interest rate that the borrower has to pay, which is variable or fixed.
What is the risk with investing in bonds?
If you buy a bond from a company and something goes wrong with its business, you may never get your interest or your money back. This is why riskier companies usually have to pay higher interest rates than solid, established companies. It's also why a company's bonds pay more than the bank. People need to make more money on their bond to make up for the risk that they may not receive the promised interest rate or their original money back.
What is an example of financing a bond?
Instead of borrowing $5M from one entity, why not borrow $1,000 from $5000 entities. A company decides to issue bond certificates. They have a face value or par value of $1000. It has 10% interest rate or annual coupon. Meaning that lender is due $100 a year. Maturity is in 2 years. When you buy this bond, you are essentially lending this company $1000. The coupons are paid semiannually, you get $50 every 6 months. They will also pay you. The last payment at the end of the maturity will be the $50 coupon, plus the original $1000.
What is a maturity date?
It is the date which the entire principal and interest rate will be paid back
What does maturity mean?
It is the time it takes the institution to pay off the original loan.
What is a Series HH bond?
Non marketeable (meaning they can't be sold) US savings bond that pays semi annual interest based on a coupon rate. The coupon is locked in at a fixed rate for the first 10 years, which is reset by the US Treasury for the rest of the bond's life. Interest on these bonds is exempt from state and local taxes but not federal taxes.
If the annual interest rate on the 10 year government bond is 6%,
That essentially means that people who are willing to lend their money out for 10 years, but are unwilling to take any risk of losing their original investment or of not receiving the promised interest rate, can still expect to receive 6% each year on their money. In other words, for people willing to lock their money up for 10 years, the "no risk" rate of return is 6%. This means that if anyone asks you to loan them money or to invest over the long term, they better expect to pay more than 6% a year because you can get 6% without taking any risk. All you have to do is lend money to the US govt, and they'll guarantee your 6% each year with your money back after 10 years.
What is a Series EE bond?
US government Savings bond that is guaranteed to at least double over the initial term of the bond, typically at least 20 years. Most of these have a total interest paying life that extends beyond the original maturity date, up to 30 years from issuance. The interest rate is fixed. They are expected to increase in value monthly, with interest payments semiannually. They are considered ultra safe. They are typically exempt from state and local taxes.
Whenever the long term government bond is paying less than 6%,
We still assume the rate is 6%. In other words, we want to make sure we earn a lot more from our other investments than we could earn without taking any risk.
What are US Savings bonds?
You are lending money to the government by purchasing the bond. Over the years, the government pays back the money, plus interest. It offers a fixed rate of interest over a period of time. They are not subject to state or local income taxes. They are one of the safest investments because they are endorsed by the federal government and are risk free. They do not earn much interest
What should you do if you're not comfortable risking the $1k you were going to lend to a company?
You can buy US govt bonds. Lending money to the US govt is as close to riskless as anything can be. If you are willing to lend the US government your money for 10 years, the government might agree to pay you something like 6% a year. If you lend for shorter periods of time, the rates will usually be lower-maybe 4 or 5%. For the most part, we would be looking at the US government bond that matures after 10 years. Well want to compare how much we can earn from a safe bet like a US govt bond with our other long term investment choices.
What must you do to guarantee no loss of your original bond investment?
You must hold it until it matures, possibly 5 or 10 years.