BONDS 101 PUBLIC FUNDS INVESTING

Transcription

1 BONDS 101 PUBLIC FUNDS INVESTING Prepared for: Presented by: Paul Jarvis, Peter Becker & Aaron Bonck Member SIPC and FINRA. 1 1

2 Source: Bloomberg 2 2

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4 BOND BASICS - WHAT IS A BOND? $100 1 Year 10.00% = $110 10% 4 4

5 BOND BASICS - WHAT IS A BOND? Bond Buyer (Lender) Bond Issuer (Borrower) $100 1 Year 10.00% = $110 (Fixed) 10% 5 5

6 BOND BASICS - MARKET RATES WENT DOWN TO 8% Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% = $110 (Fixed) 8% 6 6

7 BOND BASICS - SO, THE PRICE OF THIS BOND WENT UP... Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% = $110 (Fixed) 8% Interest rates for similar bonds went down to 8%. Therefore: Sell the bond at this price: $102 1 Year 8.00% (approx $8) = 110 (fixed) 7 7

8 BOND BASICS - MARKET RATES WENT UP TO 12% Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% = $110 (Fixed) 12% Interest rates for similar bonds went up to 12%. 8 8

9 BOND BASICS - SO, THE PRICE OF THIS BOND WENT DOWN... Bond Buyer (Lender) Bond Issuer (Borrower) Market rate for similar loans: $100 1 Year 10.00% = $110 (Fixed) 12% Interest rates for similar bonds went up to 12%. Therefore: Sell the bond at this price: $98 1 Year 12.00% (approx $12) = 110 (fixed) 9 9

10 BOND BASICS - WHEN RATES GO DOWN, PRICES NECESSARILY GO UP Bond Maturity Value $

11 BOND BASICS The difference between 1.00% and 1.01% = 1 Basis Point The $ value of 1 Basis Point on $1 million Invested for 1 year = $100 In other words: 1 BP/$1MM/1 Year = $100 1 BP/1MM/6 Months = $

12 BOND BASICS - A TYPICAL BOND 04/15/14 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/14 04/15/16 $5,000 04/15/15 $5,000 10/15/15 $5,000 04/15/ % $1,000,000 Don t forget about interest on interest

13 BOND BASICS - THIS BOND IS AT A DISCOUNT 04/15/14 Coupon Interest Payments Yield Maturity $990,012.50% $2,500 10/15/14 04/15/16 $2,500 04/15/15 $2,500 10/15/15 $2,500 04/15/ % $1,000,

14 BOND BASICS - THIS BOND IS AT A PREMIUM 04/15/14 Coupon Interest Payments Yield Maturity $1,039, % $15,000 10/15/14 04/15/16 $15,000 04/15/15 $15,000 10/15/15 $15,000 04/15/ % $1,000,

15 BOND BASICS SELL THE BOND BEFORE MATURITY: NO RATE CHANGE SELL 04/15/15 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/14 04/15/16 $5,000 04/15/15 SELLER RECEIVES $1,000,000 $5,000 10/15/15 NOTE: Actual results may vary depending on original maturity of bond and length of holding period MATURITY $5,000 4/15/ % $1,000,

16 BOND BASICS SELL THE BOND BEFORE MATURITY: RATES WENT DOWN SELL 04/15/15 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/14 04/15/16 SELLER RECEIVES $5,000 04/15/15 $1,004,980 $5,000 10/15/15 MATURITY $5,000 4/15/16.50% $1,000,

17 BOND BASICS SELL THE BOND BEFORE MATURITY: RATES WENT UP SELL 04/15/15 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/14 04/15/16 SELLER RECEIVES $5,000 04/15/15 $995,050 $5,000 10/15/15 MATURITY $5,000 4/15/ % $1,000,

18 BOND BASICS - A TYPICAL BOND THAT IS CALLABLE 04/15/14 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/ % 04/15/16 Callable here $5,000 04/15/15 $5,000 10/15/15 $5,000 04/15/ % $1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 18 18

19 BOND BASICS - A TYPICAL BOND THAT IS CALLABLE WITH 3 CALL DATES 04/15/14 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/ % 04/15/16 Callable here, here, and here. $5,000 04/15/ % $5,000 10/15/ % $5,000 04/15/ % $1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 19 19

20 BOND BASICS - A CALLABLE BOND, PRICE IS AT A PREMIUM 04/15/14 Coupon Interest Payments Yield Maturity $1,022, % $15,000 10/15/14 04/15/16 Callable here $15,000 04/15/15.75% $15,000 10/15/15 $15,000 04/15/ % $1,000,000 Yield to Call =.75% Yield to Maturity = 1.85% 20 20

21 BOND BASICS - A CALLABLE BOND, PRICE IS AT A DISCOUNT 04/15/14 Coupon Interest Payments Yield Maturity $992,080.50% $2,500 10/15/14 04/15/16 Callable here $2,500 04/15/ % $2,500 10/15/15 $2,500 04/15/16.90% $1,000,000 Yield to Call = 1.30% Yield to Maturity =.90% 21 21

22 BOND BASICS - A TYPICAL BOND THAT IS CALLABLE 04/15/14 Coupon Interest Payments Yield Maturity $1,000, % $5,000 10/15/ % 04/15/16 Callable here $5,000 04/15/15 $5,000 10/15/15 $5,000 04/15/ % $1,000,000 Yield to Call = 1.00% Yield to Maturity = 1.00% 22 22

23 BOND BASICS AFTER YOU BUY A BOND WHAT HAPPENS NEXT? Investor Wall St Inventory Gives Verbal Order Broker Bond Is Purchased 23 23

24 BOND BASICS AFTER YOU BUY A BOND WHAT HAPPENS NEXT? Investor Confirmation (Receipt) Broker 24 24

25 BOND BASICS AFTER YOU BUY A BOND WHAT HAPPENS NEXT? TYPICAL TRADE CONFIRMATION ID : 3128X8EQ1 Settlement : 4/29/14 BUY : $1,000,000 ISSUER : FEDERAL HOME LOAN BANK Security : FHLB /15/16 Price : 100 Yield: 1.00 Principal USD $1,000, Accrued $ (4/15/14 4/29/14) Total USD $1,000, Call Feature: Callable one time only on 4/15/15 Call Schedule: Date Price Yield 4/15/ /15/ Maturity 25 25

26 BOND BASICS AFTER YOU BUY A BOND WHAT HAPPENS NEXT? Forwards Confirmation Wires $ Safekeeping Bank Investor Bond Confirmation Broker 26 26

27 DELIVERY VERSUS PAYMENT (DVP) IS BEST PRACTICES 27 27

28 RESOURCE CENTER, DATA AND CHARTS CENTER, DAILY TREASURY YIELD CURVE RATES 28 28

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30 The information provided, while not guaranteed as to its accuracy or completeness, has been obtained from sources believed to be reliable. This is for informational purposes only. Because of individual client requirements, it should not be construed as advice designed to meet the particular needs of any client. This information should not be used as the primary basis of investment decisions. Contact your financial and tax advisors before implementing any strategies outlined in this material. Member SIPC and FINRA