Bonds & Fixed-Income Securities

Investment Strategies
Stocks vs Bonds

• Stocks represent ownership of

companies.
• They represent participation in a
company’s growth
• Bonds represent loans made to
companies. Contractual loans are made
between investors and institutions
A Closer Look: Bonds

• Form of debt

• Face value is returned to the investor

at maturity; what about interest?

• Help the federal or state governments,

or companies to generate revenue

• Default risk
A Closer Look: Stocks

• Voice in a company

• Investments have ambiguous returns

• Returns directly related to rising stock

prices

• Higher returns, higher risk

Bonds vs Stocks
Bond Rating Agencies

• Rating agencies are private companies that evaluate

the bond’s financial health and ability to repay its
obligations in a timely manner.

• Major agencies include Moody’s Investor Service,

Standard and Poor’s Rating Services, and Fitch
IBCA.

• Moody’s rates bonds from Aaa, the highest rating,

to D, the lowest.

• Standard and Poor rates from AAA to C.

Classifications

• Investment Grade Bonds: Bonds rated higher

than Baa on Moody’s or BBB on Standard and
Poor’s. They possess the lowest risk of any
available bond. The high rating reflects a
company with good financial stability. Due to
the low risk the yield (interest) is also lower.

• Intermediate Grade Bonds: Bonds with

companies in a fair condition. They usually
have low risk in a short term but become more
risky with a longer maturity. The increase in
risk costs the issuer a higher interest rate. The
ratings are B, Ba for Moody’s and BB for
Standard and Poor’s.
Junk Bonds

• Junk Bonds are the lowest rated bonds. They are

rated at Caa/CCC or lower. These are the most
speculative of bonds and therefore bear the highest
risk for even a short term. Junk bonds tend to be
associated with a company falling apart or one on
its way to investment quality. The yields junk
bonds pay are high at a high risk.
• “Junk Bonds” are most associated with the 1980’s
when lots of mergers and acquisitions occurred. To
finance those expenses companies would sell junk
bonds to the public with very high interest such that
some investors would buy their low-quality bonds.
What is a Mortgage?

• A mortgage is a conveyance of an
interest in property as security for the
repayment of borrowed money.

• A mortgage loan is a loan to finance

the purchase of real estate, usually
with specified payment periods and
interests rates.
Mortgage Loans

• A mortgagor (borrower) gives the mortgagee

(lender) a lien as collateral for the loan.
• A lien is a legal claim against an asset which
is used to secure the loan.
• The property is normally real estate- land,
houses, buildings, but it could also be large
items such as ships or huge machinery.
• Loans always come with interest rates and
these rates vary with the type of mortgage
one gets.
Types of Loans

• There are many different types of mortgage

loans: conventional, general, first, second,
long term, open-end, close-end, etc…
• Most people are familiar with fixed-rate
mortgages and they are normally 15 or 30
years in length.
• The longer the term, the higher the interest
rate.
• Variable rate? Subprime mortgage loans …
Mortgage Requirements

• Getting a mortgage depends on:

-credit history -income
-the lender -purpose
-the state -amount loaned
To get a mortgage one must talk to a
mortgage broker.

Questions?