Mr Bernstein Bonds aka Fixed Income March 2020 Stock Market Analysis amp Personal Finance Mr Bernstein Bonds Bond is a contract to repay a loan on a given maturity date ID: 782541
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Stock Market Analysis and Personal Finance
Mr. Bernstein
Bonds (aka Fixed Income)
March 2020
Slide2Stock Market Analysis
& Personal Finance
Mr. Bernstein
Bonds Bond is a contract to repay a loan on a given maturity date. Face value = final payout ( ~ loan amount) Bonds are traded Over the Counter (OTC) – there is no meaningful exchange
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Slide3Stock Market Analysis
& Personal Finance
Mr. Bernstein
Types of BondsDebentures, or unsecured bonds, are backed only by the reputation of the issuer. Most corporate bonds are debenturesMortgage bonds are backed by a lien on a home or other real estateSecured bonds are backed by a lien on collateralConvertible bonds can be converted into stockBond contracts may have other provisions called covenantsJunior debt is subordinated to senior debt
Floaters have coupons which adjust with interest rates
ETFs are available to buy or short entire bond sectors
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Slide4Stock Market Analysis
& Personal Finance
Mr. Bernstein
Types of Bonds: The StackCorporations and other borrowing entities issue various levels of debt known as the “Financing Stack”Various bonds can have priority over other bonds in the case of bankruptcyDue to their varying risks of repayment, the various bonds will trade at differing interest ratesIn order of priority, a typical stack may include: Collateralized Bonds Senior Bonds
Junior Bonds
Preferred Stock
Common Stock
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Slide5Stock Market Analysis
& Personal Finance
Mr. Bernstein
Why Buy Bonds?Interest IncomeCapital Gains When interest rates fall, bond prices rise When interest rates rise, bond prices fall5
Slide6Stock Market Analysis
& Personal Finance
Mr. Bernstein
Why Buy Bonds?Interest Income Current Yield = Annual Income / PriceCapital Gains When interest rates fall, bond prices rise When interest rates rise, bond prices fall6
Slide7Stock Market Analysis
& Personal Finance
Mr. Bernstein
Why Buy Bonds?Interest IncomeCapital Gains When interest rates fall, bond prices rise When interest rates rise, bond prices fallExample: Exxon 5% due 4/5/2023…at 5% yield bond price =100. At 4% yield bond price = 110. Why? 5% coupon is reduced by capital loss of 10% over ten years, or 1% per year.7
Slide8Stock Market Analysis
& Personal Finance
Mr. Bernstein
Why Buy Bonds?Yield to Maturity = Coupon Income + (Pymt at maturity - Price Paid)Price PaidYield to Maturity is the primary measure of a bond’s value8
Slide9Stock Market Analysis
& Personal Finance
Mr. Bernstein
Bond RatingsRatings Agencies rate bonds based on the likelihood of repayment at maturityMoody’s, Standard & Poor’s and Fitch are the three major Rating AgenciesBonds are rated from D to AAABBB and above are “Investment Grade”BB and below are “High Yield” or “Junk” bonds9
Slide10Stock Market Analysis
& Personal Finance
Mr. Bernstein
Bond RatingsRatings Agencies are paid by issuers of new bonds, i.e. corporations, finance companiesIs this a conflict of interest?Can investors rely on ratings?10
Slide11Stock Market Analysis
& Personal Finance
Mr. Bernstein
Bond PricingInvestors generally demand more yield for: Higher perceived risk of repayment Higher perceived risk of inflation Longer maturitiesRelative value is determined by the difference between the Yield to Maturity and the yield on a comparable maturity US Treasury bond (the Spread to Treasuries)
Corporate Bond Price Information (FINRA)
http://finra-markets.morningstar.com/MarketData/Default.jsp
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Slide12Stock Market Analysis
& Personal Finance
Mr. Bernstein
Bond PricingTo receive a higher yield to maturity, what component of the Yield to Maturity formula must change?Yield to Maturity = Coupon Income + (Pymt at maturity - Price Paid)Price Paid
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