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18-14 Securities: Stocks & Bonds CH 18]

income received from these bonds may be exempt from state and federal income tax.
Municipal bonds are a good financial choice for investors who put aside 10% with each
paycheck. With an initial investment of $1,000 to purchase Municipal bonds additional
contributions to this asset investment can be as little as $100. The growth in this
investment is tax free and currently could yield 6% per annum or 0.05% compounded
monthly. Imagine your paycheck tithe growing over time and you would set this up with a
financial planning firm.
Credit Ratings. When applying for a loan to purchase a home or automobile, the
individual is rated on their credit worthiness. Similarly corporations are evaluated on their
credit worthiness and the corporate rating is affixed to the bond being issued. In both cases,
credit worthiness represents the likelihood that the borrower will meet the payment
schedule and pay off the debt.
A bond rating is a grade given to a bond by various rating services that indicates its
credit quality. It takes into consideration a bond issuer's financial strength and its ability to
pay a bond's principal and interest in a timely fashion. Moody's, Standard and Poor's, Fitch
Ratings and DBRS are some of the most internationally known bond rating agencies. These
organizations operate to provide investors with quantitative and qualitative descriptions of
the available fixed income securities. Generally, a "AAA" high-grade rated bond offers more
security and a lower profit potential (lower yield) than a "B-" rated speculative bond. Lower
ratings generally cause a bond's price to fall since it is not as attractive to buyers.
Highly rated corporate or government bonds come with little perceived default risk
because government can raise taxes on the tax payer to pay the debt. Each bond, corporate
or government, carry an individual credit rating. Investing in bonds are generally considered
to be a relatively safe investment with a guaranteed rate of return.
Bonds may be convertible, meaning they can be converted into company stock as
compared to non-convertible bonds. Investors who prefer convertibles generally will accept a
Registered bond: slightly lower return to get them.
is a bond which has When issued, bonds can be either registered or bearer bonds. The difference is that a
its owner registered registered bond is a bond which has its owner registered with the bond’s issuer. The
with the bond's
issuer. The owner's owner’s name and contact information is recorded and kept on file with the company,
name and contact allowing the company to make the bond’s payment to the appropriate person. The owner
information is automatically receives a check from the issuer when the interest is due. When registered
recorded and kept bonds are sold, the transfer must be recorded on the records of the issuer so that the
on file with the interest payment is sent to the new owner.
company, allowing it In contrast to the registered bond, a bearer bond is a security that is unregistered. No
to pay the bond's records are kept of the owner, or transactions involving a change in ownership. A bearer
coupon payment to
the appropriate bond will have coupons attached that represent semi-annual interest payments to be
person. redeemed on or after specific dates. Anyone (the bearer) who provides the necessary
coupons to the issuer can receive the interest payment regardless of whether that person is
the actual or original purchaser of the bond.
Bond certificates have printed on them the value of the bond that the issuer promises to
Bearer bond: a pay at maturity and the date the payment becomes due. The amount due as printed is the
bond or debt bond’s face value or par value. Most corporate bonds are issued with a face value of
security issued by a
business entity such $1,000 and occasionally in denominations of $100 and $500. The interest payment on the
as a corporation, or bonds is typically every six months or annually and occasionally quarterly. United States
a government. As a Savings Bonds, Series EE (Electronic E), are purchased at a 50% discount and the interest
bearer instrument, it accumulates for 30 years though it is guaranteed to reach its face value in 20 years, and
differs from the more continues to accumulate interest for an additional ten years at which time interest
common types of accumulation ceases. If negotiated after the maturity date, the face value is what is paid
investment and any accumulated interest up to its 30 year limit. To purchase Series EE bonds the
securities in that it is
unregistered—no investor would contact the Federal Treasury Department for a direct purchase.

records are kept of Interest Earned: Bond Rate of Return
the owner, or the
transactions Bonds represent a loan, corporate debt, to a corporation that the investor can purchase.
involving ownership. The return to the investor is the stated interest for the bond (Coupon %) and the interest the
bond holder (investor) can receive. Bonds are sold in $1,000 units. When purchasing a bond
the investor will look for (1) stability and reputation of the company, (2) the interest return
the investor can earn on their investment.
In Table 18.2 are an alphabetical list of 100 bonds recording the company, their stock

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