tailieunhanh - Protecting Your Wealth in Good Times and Bad Chapter 9

Chapter 9 Investment Choices: Bonds. Bonds are nothing more than loans issued by corporations, government entities, banks, and people like you. When you take out a home mortgage, you are issuing a bond. You owe interest for each day you use someone’s money. Eventually a bond needs to be paid off. | Chapter 9 Investment Choices Bonds Credit is the pavement along which production travels. John Maynard Keynes B . mole - loans _ by __. government entities banks and people like you. When you take out a home mortgage you are issuing a bond. You owe interest for each day you use someone s money. Eventually a bond needs to be paid off. This is done periodically over the life of the bond serial payments or all at once at maturity bullet payment . Mortgages are serial bonds because you pay a little principal back with each mortgage payment. If you lend someone money in the form of a bond you are entitled to collect interest on that money while it is being used. Eventually you get your principal back if the borrower is creditworthy. When a bond issuer puts up backing or collateral to borrow money it is called a secure bond. Your mortgage is backed by the equity in your house so it is secure credit. When the only thing that backs a bond is a promise to pay it is called a debenture. Debentures are subordinate to secure bonds meaning that if the Copyirght 2003 by The McGraw-Hill Companies Inc. Click Here for Terms of Use. 136 Investment Choices Bonds issuer went into bankruptcy the secure bondholder would be paid first. In general investing in bonds is less risky than investing in stocks because if a company goes bankrupt the stockholder is the last to get any money. Since the risk of owning bonds is lower than the risk of owning stocks the expected returns are also lower. The expected total return of a bond is called its yield to maturity YTM . The YTM of a bond is based on variety of factors including the cash interest payments the length of time the money is borrowed and the creditworthiness of the borrower. Interest Rates and Market Conditions Yields move around every day based on market conditions. In addition the banking industry plays a major role in setting current yields. Banks use money in checking accounts and time deposits certificates of deposit to make .