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Stock Market Analysis and Personal Finance Stock Market Analysis and Personal Finance

Stock Market Analysis and Personal Finance - PowerPoint Presentation

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Stock Market Analysis and Personal Finance - PPT Presentation

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

bond bonds finance stock bonds bond stock finance market analysis personal bernstein interest amp yield maturity price rates rise

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Slide1

Stock Market Analysis and Personal Finance

Mr. Bernstein

Bonds (aka Fixed Income)

March 2020

Slide2

Stock 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

2

Slide3

Stock 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

3

Slide4

Stock 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

4

Slide5

Stock 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

Slide6

Stock 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

Slide7

Stock 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

Slide8

Stock 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

Slide9

Stock 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

Slide10

Stock 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

Slide11

Stock 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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Slide12

Stock 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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