Understanding Bonds: A Beginner's Guide to Investing in Fixed-Income Securities

1. What is a Bond? The Stock Market Game

2. A bond… • Is like an IOU • When you buy a bond, you’re lending money to the issuer • Corporation, the government, or a government agency • Has a fixed interest rate • The coupon rate • You get paid interest routinely • You get repaid the principal or “face value” • Most bonds have a $1000 face value

3. How is bond interest paid? • A treasury bond will pay 3% interest a year for 30 years. • The investor will receive $30 per year, or a total of $900 at the end of 30 years • A corporate bond will pay 6% interest each year for 2 years. • The investor will receive $60 per year, or a total of $120 at the end of 2 years

4. Types of Bonds

5. Bond Rating • Bonds are rated • “Investment grade bonds” • Highest rating by Moody’s, Standard & Poor’s and Fitch • Considered the safest of bond investments • Has the least chance of missing interest payments or failing to pay back the face value (principal)

6. Terms to Know: • Fixed-Income Investments: Pay interest on a set schedule. Includes corporate, municipal, agency, and US Treasury bonds • High-Yield Bonds: Pay a higher rate of interest than investment grade bonds. Have a lower rating. Also known as “Junk Bonds” • Investment Grade Bonds: From a reliable issuer • Issuer: An organization who issues and is obligated to pay principal and interest on a bond • Coupon rate: Interest rate • Face Amount: The principal • Maturity: The date when the principal amount is to be paid

7. Purchasing Bonds • http://finance.yahoo.com/ • Investing • Bonds • Advanced Bond Screener