Question

3. Research any bonds issued by a local government body in your community / state. (preferably massachusetts or new hampshire)

a) Identify the bond issuer, the purpose of the bond, the total amount being raised.

b)What is the yield of this bond?

c) When is the maturity date of this bond?

d) What is the rating of this bond? What does this rating mean?

c) What are 3 benefits of investing in this bond?

d) What are 3 drawbacks of investing in this bond?

e) Would you personally buy this bond? Why or why not?

Answer 1

a) Bonds are debt instruments issued by bond issuers to bond holders. A bond is a debt security under which the bond issuer owes the bond holder a debt including interest or coupon payments and or a future repayment of the principal on the maturity date. Variations exist in bond types, payment terms, and features.

Interest on bonds, or coupon payments, are normally payable in fixed intervals, such as semiannually, annually, or monthly. Ownership of bonds are often negotiable and transferable to secondary markets. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.

A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which thebond issuer is obligated to pay a specified amount of money at specified future dates.

b) Bond yield is the amount of return an investor realizes on a bond. Several types of bond yields exist, including nominal yield which is the interest paid divided by the face value of the bond, and current yield which equals annual earnings of the bond divided by its current market price. Additionally, required yield refers to the amount of yield a bond issuer must offer to attract investors.

The yield-to-maturity (YTM) of a bond is another way of considering a bond's price. YTM is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate.

c) The maturity date is the date on which the principal amount of a note, draft, acceptance bond or another debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.

Maturity date – The maturity date is the date on which an investor can expect to have his or her principal repaid.

d) A bond rating is a grade given to a bond that indicates its credit quality. Private independent rating services provide these evaluations of a bond issuer's financial strength or its ability to pay a bond's principal and interest in a timely fashion.Bond ratings are expressed as letters ranging from "AAA," which is the highest grade, to "C" or "D" ("junk"), which is the lowest grade. Different rating services use the same letter grades, but use various combinations of upper and lower-case letters to differentiate themselves.

The bond rating system helps investors determine a company's credit risk. Think of a bond rating as the report card for a company's credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating. The chart below illustrates the different bond rating scales from the major rating agencies in the United States: Moody's, Standard and Poor's and Fitch Ratings.

c) Benefits

• Bonds can be a reliable source of current income depending on the structure of the bond you buy
• Bonds provide a certain element of liquidity, as the bond market is large and active
• If you sell a bond before it matures, you may receive more or less than your principal investment because bond values fluctuate
• Generally, interest income from federal government bonds is exempt from taxation at the state and local level, and the interest income from municipal bonds is usually not subject to federal tax
• In the spectrum of the investment options, investment grade bonds are a relatively low-risk investment.

d)  Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk, and yield curve risk.