Download Buying and Selling Bonds

Buying and Selling
Bonds
Lesson 13.2

You can buy savings bonds and Treasury
securities through the FED

The FED will mail you an application and
you will send your check or money order
back with your application

The FED uses a system called Treasury
Direct to record and store data about
Treasury securities and their owners
Purchasing bonds through the
Federal Reserve

Securities can be bought online through
Treasury Direct at www.treasurydirect.gov

Interest (and principal when bond
matures) earned is deposited directly into
your account

With Treasury Direct, you can reinvest
into new securities after old ones mature
Treasury Direct System

U.S. government securities may also be
bought through banks or brokers but you
will pay a commission

Both Full-service and discount brokers can
assist you in purchasing bonds. But, you
will receive not advice in your decision to
buy or sell
Buying bonds through commercial
banks and brokers

You can set up a bank account for
purpose of buying and selling municipal
bonds.

Note: Most banks buy large blocks of
municipal bonds and make them available
to their customers and there is a fee for
this service although it may be
incorporated into the price of the bond
Purchasing municipal bonds
through banks and brokers

Some employers will withhold money from
your paycheck and when your
withholdings are sufficient, the savings
bond will be purchased and sent to you.

Note: This process takes longer because
your employer will process the money
through a bank which in turn purchases
the bond.
Buying bonds through payroll
deductions

Most bond options
require a minimum
investment of
$1,000.

Only savings bonds
can be purchased
with small, regular
payments.
Bondholders earn interest each day they
hold the bond
Bondholders redeem bonds at face value at
maturity
Bondholders can sell their bond before
maturity at a price higher than they paid
for it as bonds often appreciate in value
3 ways bond investors earn $

They have a fixed interest rate

They represent a loan that the issuer must
repay

Bonds prices tend to remain steadier than do
stock prices

Bonds prices tend to react in the opposite
direction of stock prices and therefore offset
risk of stocks in one’s portfolio
What makes bonds a safe
investment?

Bonds are not
insured, investors
can loose their
money if the related
corporation or
municipality
defaults.
What risk in associated with
bonds?
Independent Rating
services:
 Moody’s
(www.moodys.com)

Standard & Poor’s
(www.standardandpoors.
com)
Highest
Rating:
AAA
Lowest Rating:
D (bond is in
default)
Who rates bond’s risk level?
Investment grade bond has a rating of:
 Baa or higher for Moody’s

BBB or higher in S& P’s
Note: Unfortunately, the higher the bond’s
rating, the lower the interest rate you will
earn
Lower case letters in ratings indicate more
risk than capital letters
Facts about Bond Rating

A junk bond is a bond that has a low
rating or not rating at all.

Any bond with a rating of Ba /BB or lower
is called a junk bond

Junk bonds have higher yields but also
can have reasonable level of risk.

Don’t buy junk bonds if you can’t afford to
loose your investment
What is a Junk Bond

a – senior bond

b – split bond

c – zero coupon bond

d – unsecured bond

E – secured bond

C – Junk Bond
Bond Rating Types
READING CORPORATE BOND
LISTINGS SEE PAGE 316
Name
Name of the bond
Type/Rating
Type of bond/it’s Rating
Coup
Fixed Interest Rate (the coupon rate)
Mat
The Maturity Date
3 p.m. Bid
Final closing bid for the day
Net Chg
Compares 3 p.m. bid with previous day
Yld
The current yield for the bond (coupon
rate divided by average market value)

Only factor that has a real effect on
bonds: INTEREST RATES
When interest rates rise value of bonds
Why?
The bonds are paying less in comparison to
other fixed-rate investments. Conversely,
when interest rates drop, fixed-rate bonds
will become attractive because they are
“locked-in” at higher rates.

MORE FACTS ABOUT BONDS