Personal Finance: Another Perspective. Investments 4: Bond Basics. Objectives. A. Understand risk and return for bonds B. Understand bond terminology C. Understand the major types of bonds D. Understand how bonds are valued E. Understand the costs of investing in bonds.
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Bonds are susceptible to a number of risks:
While there are many different types of bonds, they fall under a few major headings:
(AIP + (PV – CP)/YM) / ((PV-CP)/2)
AIP = annual interest payments
PV = Par value
CP = Current market price
YM = Years to maturity
A. Do you understand risk and return for bonds?
B. Do you understand bond terminology?
C. Do you understand the major types of bonds?
D. Do you understand how bonds are valued?
E. Do you understand the costs of investing in bonds?
You are considering purchasing a bond with a 5.00% coupon interest rate, a par value of $1,000, and a market price of $990. The bond will mature in 9 years. A. What is the bond’s current yield? B. Calculate the bond’s yield to maturity.
Note: Since you paid less for the bond than par, and your coupon interest rate was 5%, that would increase your YTM.
How much will a $1,000 EE savings bond cost when you initially purchase it? Assuming the bond earns 3.6% annually, approximately how long will it take for the bond to reach its stated face value? Use both the “Rule of 72” and your calculator.
A. Since EE bonds are sold at half their face value, a $1,000 face value EE Savings bond will initially cost $500.
B. The “Rule of 72” states that an investment will double every time Years * interest rate (in percent) = 72. For example, an 8% return that you hold for 9 years should double (8 * 9 = 72). Using the rule of 72, it will take approximately 20 years to double in value or 72/3.6 = 20.
Using your calculator, set your Present Value PV to -$500, your Future Value FV to $1,000, your interest rate I = 3.6%, and solve for N. Your answer is 19.6 years
The bond’s current yield is 3.75% with 5 years left until maturity. Kim is in the 15% tax bracket, Natalie is in the 28% tax bracket, and Clinton is in the 35% tax bracket. Calculate the equivalent taxable yield for your three friends. Assuming a corporate bond yields 5.0%, which of your friends should purchase the municipal bond?
You paid $1,000 for a Boston Scientific bond at the end of the previous year. At the end of last year, the bond was worth $1,050. You are in the 25% federal marginal tax rate, and you live in a state that has no state income tax. Over the course of last year, you received $40 in coupon interest payments. a. What was your before-tax return for the bond? b. What is your after-tax return assuming you did not sell the bond?