BONDS and STOCKS

Learning Objectives:-
 Definition of a Bond
 Credit Ratings
 Pricing Bonds
 Bonds and Taxes
 Issuers of Bonds
 How to Buy Bonds
 Alternatives to Buying Directly
 The Bottom Line
The Basics Of Bonds

•Bond
•A bond is a fixed income investment in which an investor loans money to an entity (corporate
or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

•Bond Valuation: the Fair Value of a Bond.

•Bond valuation is a technique for determining the theoretical fair value of a particular bond.

•Debt Issue
•A debt issue is a financial obligation that allows the issuer to raise funds by promising to
repay the lender at a certain point in the future.
• 
•Understanding the Bond Market
•The bond market is the collective name given to all trades and issues of debt securities. e.g.
corporate, government, and municipal bonds.

•Nominal Yield
•A bond's nominal yield, depicted as a percentage, is calculated by dividing all the annual
interest payments by the face value of the bond.

•Callable Security Definition

•A callable security is a security with an embedded call provision that allows the issuer to
repurchase or redeem the security by a specified date.
• Coupon Rate
A coupon rate is the yield paid by a fixed income security, which is the annual coupon payments divided by the
bond's face or par value.

•Bond Valuation: the Fair Value of a Bond

Bond valuation is a technique for determining the theoretical fair value of a particular bond.
 
•Death Put Definition
A death put is an option added to a bond that guarantees that the heirs of the deceased can sell it back to the
issuer at par value.
• Pull to Par Meaning in Bonds
Pull to par is the movement of a bond's price toward its face value as it approaches its maturity
date.

•Bond
A bond is a fixed income investment in which an investor loans money to an entity (corporate
or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

•Nominal Yield
A bond's nominal yield, depicted as a percentage, is calculated by dividing all the annual
interest payments by the face value of the bond.
 
Face Value : Definition and Features
• Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer.
For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the
amount paid to the holder at maturity, typically in $1,000 denominations. The face value for bonds is often
referred to as "par value" or simply "par."
 Face value describes the nominal value or dollar value of a security; the face value is stated by the issuing
party.
 A stock's face value is the initial cost of the stock, as indicated on the certificate of the stock in question; a
bond's face value is the dollar figure due to be paid to the investor, once the bond reaches maturity.
 The actual market value of a stock or a bond is not reliably indicated by its face value, because there are
many other influencing forces at play, such as supply and demand.
Understanding Face Value

•In bond investing, face value (par value) is the amount paid to a bondholder at the maturity date, as long as the
bond issuer doesn't default. However, bonds sold on the secondary market fluctuate with interest rates. For
example, if interest rates are higher than the bond's coupon rate, then the bond is sold at a discount (below par).
•Conversely, if interest rates are lower than the bond's coupon rate, the bond is sold at a premium (above par).
While the face value of a bond provides for a guaranteed return, the face value of a stock is generally a poor
indicator of actual worth.
• 
•While the par value of bonds is generally static, there is a noted exception with inflation-linked bonds, whose
par value is adjusted by inflation rates for predetermined time periods.
•Face Value and Bonds
•A bond's face value is the amount the issuer provides to the bondholder, once maturity is reached. A bond may
either have an additional interest rate, or the profit may be based solely on the increase from a below-par
original issue price and the face value at maturity.
•Face Value and Stock Shares
•The cumulative face value of the entirety of a company’s stock shares designates the legal capital a corporation
is obligated to maintain. Only the above-and-beyond capital may be released to investors, in the form of 
dividends. In essence, the funds that cover the face value, function as a type of default reserve.
•However, there is no requirement dictating the face value businesses must list upon issue. This affords
businesses the leeway to use very low values to determine the size of the reserve. For example, the par value of
AT&T shares is listed as $1 per common share, while shares of Apple Inc. have a par value of $0.00001. 12
Face Value vs. Market Value

•The face value of a stock or bond does not denote the actual market value, which is determined based on
principles of supply and demand--often governed by the dollar figure at which investors are willing to buy and
sell a particular security, at a specific point in time. In fact, depending on market conditions, the face value and
market value may have very little correlation.
•In the bond market, interest rates (compared with the bond’s coupon rate) may determine if a bond sells above
or below par. Zero-coupon bonds, or those where investors receive no interest, aside from that associated with
purchasing the bond below face value, are generally only sold below par because that's the only feasible way an
investor can receive a profit.
•Is Face Value the Same As Par Value?
•Yes. Face value refers to the dollar value of a financial instrument when it is issued. The face value of a bond is
the price that the issuer pays at the time of maturity, also referred to as “par value.” By comparison, the face
value of a stock is the price set by the issuer when the stock is first issued. 
•What Is the Difference Between Face Value and Market Value?
•While face value is the original price of a stock as set by its issuer, market value is influenced by external
supply and demand forces. Market value is the price that the market will bear, and it can differ significantly
from a stock’s initial price. For example, the face value of Apple shares is $0.00001, while the market value of
its shares can fluctuate above $100. 
•What Is the Difference Between Face Value and a Bond’s Price?
•A bond’s face value is fixed, often issued in $1,000 denominations. By contrast, its’ price fluctuates in response
to market interest rates, time to maturity, and the issuer’s credit rating. A bond may be priced above par, or
below par based on these conditions. For example, if interest rates increase, bond prices will decline, trading at
a discount to face value in the secondary market.
•The bond markets are a very liquid and active, but can take second seat to
stocks for many retail or part-time investors.
•The bond markets are often reserved for professional investors, pension and 
hedge funds, and financial advisors, but that doesn't mean that part-time
investors should steer clear of bonds.
• In fact, bonds play an increasingly important part in your portfolio as you age
and, because of that, learning about them now makes good financial sense.
•In fact having a diversified portfolio of stocks and bonds is advisable for
investors of all ages and risk tolerance.
 
Key Features of Bonds
 Bonds are debt securities issued by corporations, governments, or other organizations and sold to investors.
 Backing for bonds is typically the payment ability of the issuer to generate revenue, although physical assets
may also be used as collateral.
 Because corporate bonds are typically seen as riskier than government bonds, they usually have higher
interest rates.
 Bonds have different features than stocks and their prices tend to be less correlated, making bonds a good
diversifier for investment portfolios.
 Bonds also tend to pay regular and stable interest, making them well-suited for those on a fixed-income.
Bonds : Types and Risks

• When you purchase a stock, you're buying a microscopic stake in the company. It's yours and you get to share
in the growth and also in the loss.
• On the other hand, a bond is a type of loan. When a company needs funds for any number of reasons, they
may issue a bond to finance that loan.
• Much like a home mortgage, they ask for a certain amount of money for a fixed period of time. When that
time is up, the company repays the bond in full. During that time the company pays the investor a set amount
of interest, called the coupon, on set dates (often quarterly).
•There are many types of bonds, including government, corporate, municipal and mortgage bonds. Government
bonds are generally the safest, while some corporate bonds are considered the most risky of the commonly
known bond types.
•For investors, the biggest risks are credit risk and interest rate risk. Since bonds are debts, if the issuer fails to
pay back their debt, the bond can default. As a result, the riskier the issuer, the higher the interest rate will be
demanded on the bond (and the greater the cost to the borrower). Also, since bonds vary in price opposite
interest rates, if rates rise bond values fall.
Issuers of Bonds

• There are four primary categories of bond issuers in the markets. However, you may also see foreign bonds
 issued by corporations and governments on some platforms.
 Corporate bonds are issued by companies. Companies issue bonds—rather than seek bank loans for debt
financing in many cases—because bond markets offer more favorable terms and lower interest rates.
 Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon
income for investors.
 Government (sovereign) bonds such as those issued by the U.S. Treasury. Bonds (T-bonds) issued by
the Treasury with a year or less to maturity are called “Bills”; bonds issued with 1 to 10 years to maturity
are called “notes”; and bonds issued with more than 10 years to maturity are called “bonds”. The entire
category of bonds issued by a government treasury is often collectively referred to as "treasuries."
Government bonds issued by national governments may be referred to as sovereign debt. Governments may
also offer inflation-protected bonds (e.g. TIPS) as well as small denomination savings bonds for ordinary
investors,
 Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie
Mac.
How to Buy Bonds

•Most bonds are still traded over the counter (OTC) through electronic markets.
• For individual investors, many brokers charge larger commissions for bonds, since the market isn't as liquid and still requires
calling bond desks in many buy and sell scenarios.
• Other times, a broker-dealer may have certain bonds in their inventory and may sell to their investors directly from their
inventory.
•You can often purchase bonds through your broker's website or call with the bond's unique ID number, called the CUSIP number,
to get a quote and place a "buy" or "sell" order.

Alternatives to Buying Bonds Directly

•If you want the income earning power of a bond, but you don't have the funds or don't want to own individual bonds, consider a 
bond ETF or bond mutual funds. These are well diversified funds that give you exposure to many different bonds, and pay a
monthly or quarterly dividend.
•Because some bonds have a minimum purchase amount, smaller investors may find these products more appropriate for their
smaller amount of capital, while remaining properly diversified.
The Bottom Line

•Most investors, regardless of age, should have at least a small amount of their portfolio allocated to fixed
income products such as bonds. Bonds add safety and consistency to a portfolio. Although there is a risk that a
company may default and cause a large loss, investment grade bonds rarely default. However, along with this
safety comes a lower rate of return.
 
•Before investing in bonds, always do further research into fixed income investing strategies.
Stocks Vs. Bonds and Markets in Canada
•Bonds represent the debts of issuers, such as companies or governments.
These debts are sliced up and sold to investors in smaller units. For
example, a $1 million debt issue may be allocated to one-thousand $1,000
bonds.
•In general, bonds are considered to be more conservative investments than
stocks, and are more senior to stocks if an issuer declares bankruptcy.
• Bonds also typically pay regular interest payments to investors, and return
the full principal loaned when the bond matures.
• As a result, bond prices vary inversely with interest rates, falling when
rates go up and vice-versa.
 
•After shares are issued they may be listed on various
stock exchanges and bought or sold through brokerage
firms.
•Shares may be listed on a stock exchange if the
companies have the size, stability and financial strength
and are willing to report publicly on their operations.
•Stock and bond markets are created by associations of brokers and dealers
to trade in securities. Shares represent ownership of companies and their
prices depend largely on the companies' expected profits.
•They represent only the right, under certain conditions, to receive payments
in the future. Ultimately, no security is worth more than it will fetch in the
marketplace.
• Companies can issue new shares to raise funds. Firms called investment
dealers underwrite these new issues, buying them from the companies
directly and reselling them to the public through sales offices across the
country and abroad.
• Although issues are usually marketed through groups of dealers,
occasionally a single dealer may place an entire issue.
• After shares are issued they may be listed on various stock exchanges and
bought or sold through brokerage firms.
• Shares may be listed on a stock exchange if the companies have the size,
stability and financial strength and are willing to report publicly on their
operations.
• Not all shares are listed on stock exchanges; some are traded in the over-
the-counter (OTC) market, which is a securities market made up of dealers
who may or may not be members of a stock exchange, and the types of
securities traded are ones not listed on any recognized stock exchange, as
well as bonds and debentures.
•The OTC market is also called the "unlisted market," the "street market" or the "between-dealer market."
•While shares represent ownership, bonds represent only a borrower's promise to make certain payments
of interest and repayment of principal.
• Companies and governments are major issuers of bonds.
• Probably the best-known bonds in Canada are CANADA SAVINGS BONDS, issued by the federal
government; they can be redeemed for their face value at any time.
• Most other bonds fluctuate daily in price because each one entitles its owner to receive a specific series of
interest payments - a rise in interest rates is equivalent to a fall in bond prices, as the given series of
payments will represent a higher rate of interest only if the cost of purchasing the bonds falls.
• Bond holders may be protected if the issuer mortgages specific assets against bankruptcy or other default.
• Bonds, like shares, are underwritten by investment dealers and can be bought and sold through banks and
other financial institutions and, in the case of savings bonds, through popular employer payroll-deduction
plans.
•Shares are either "preferred" or "common."
•When a company cannot pay regular dividends on all its shares, holders of preferred shares are
ranked ahead of those holding common shares in receiving whatever dividends are available (these
provisions may be overridden in the case of bankruptcy).
• Shares may or may not carry the right to vote at shareholders' meetings and to elect the company's
board of directors.
•An investor wanting to buy or sell bonds or shares contacts a brokerage firm and opens an account.
The sales representative ("broker") of a firm advises on the relative merits of available investments
and might permit an investor (with sufficient collateral) to buy or sell "on margin" - eg, the firm would
lend the investor a considerable percentage of the funds required (against the investor's collateral
security in case the price went to his disadvantage), charging interest on the borrowed funds.
• If they expect the price to drop quickly, investors can even "sell short" bonds or shares they do not
own, so that they can buy them back cheaply and make a speculative profit. In such cases the firm
would borrow the shares and sell them for the investor's account.
• Brokers can provide a wide range of specialized services, such as the "stop order," an order to buy
or sell shares only if the price touches a certain level. Investors can place a "stop sell" order at a
price slightly below the current price so that if prices decline the shares would automatically be sold
out at a small loss.
• Brokers can also sell "options," which give the right to buy or sell certain shares at preset prices at
any time up to a prespecified future date, but the value of these options can fluctuate dramatically,
creating a risk for the investor.
• The Board of Stock and Produce Brokers was set up in Montréal in 1842 and the Montreal Stock Exchange (MSE) in
1874.
• The MSE listed 63 securities, including stock in banks, gas utilities, railways and mining companies and government
debentures.
• The Toronto Stock Exchange (TSE) was established in 1852 by a group of Toronto businessmen who formed an
association of brokers to create a market in industrial securities.
• At first they met informally in each other's offices but by 1871 they had a common meeting place and formal rules and
regulations.
• Expanding mining activity led to the establishment of the Standard Stock and Mining Exchange (SSME) in 1899.
• After the discovery of important silver and gold deposits in northern Ontario in the first decade of the 20th century,
transactions on the SSME expanded dramatically and in 1934 the TSE merged with the SSME, keeping the name
Toronto Stock Exchange.
• The Montreal Curb Market, which started on the curb outside the MSE as a place to trade shares in ventures too small or
risky to meet listing requirements of the latter exchange, became the Canadian Stock Exchange, but then joined the MSE
in a merger in 1974.
• Canada's 3 western stock exchanges are in Vancouver, Winnipeg and Calgary. They have provided local trading facilities
primarily for shares in small, new ventures.
•In 1997 the dollar value of shares traded on the Toronto, Montréal, Vancouver, Alberta and Winnipeg
stock exchanges was $498 billion, of which 85% was transacted on the TSE and 12.4% on the MSE.
•The quoted market value of the shares listed on the TSE at the end of 1997 was $1270.3 billion.
Share values typically fluctuate considerably through time.
• The year 1987 was particularly turbulent, with the TSE 300 index high at 4118.9 and low at 2783.3;
one of the most dramatic declines occurred on "Black Monday," 19 October 1987. By the end of 1997,
the TSE 300 Index had risen to 6699.4.
• On 15 March 1999 it was announced that the 4 stock exchanges would restructure to become more
specialized in an effort to increase their competitive abilities.
• The restructuring included a merger of the Vancouver and Alberta stock exchanges to form one
common National Junior Equities Market (the Vancouver Stock Exchange), which also took over
CDN (Canadian Dealing Network) activities from the TSE. Winnipeg has been invited to join the
new amalgamated VSE.
•The TSE is now responsible for trading all Senior Canadian Equities (assuming some activity from
the MSE), and Montréal is now the trading ground for all futures and options (any futures or
options previously on the TSE will be transferred to the MSE).
•Although the exchanges are supervised by provincial securities commissions, they are essentially
self-regulating.
• The public's risk is minimized because brokers and dealers must be adequately capitalized
against default.
• Public issues of new corporate bonds or shares must be cleared for distribution by the securities
commissions of the provinces in which they are offered, and printed prospectuses outlining and
updating important facts on the new securities must be provided to potential buyers.
• Because public information about the economy or companies' prospects is quickly reflected in the
prices of the securities, it is difficult even for professional investors (such as managers of pension
funds) to earn consistently higher rates of return than those provided by the market as a whole.
•However, because "insiders" with privileged information about company affairs have been able to trade
profitably on such information, the law requires public disclosure of, or may even outlaw, their trading.
•There have been many instances of promotional fraud and manipulation of the prices of shares, but
such abuses are now illegal and severely penalized. Investors in Bre-X Minerals Limited, listed in
Calgary and later on the Toronto Stock Exchange as well, bid the value of the company's shares up to
over $6 billion in 1996.
• In 1997, they learned that they had been defrauded; the mine contained no gold. Legal actions were
subsequently launched in both Canada and the US on behalf of shareholders seeking redress.
•Ultimately, no security is worth more than it will fetch in the marketplace. Security prices are ultimately
dependent on expectations, since they represent only the right, under certain conditions, to receive
payments in the future.
• Securities markets uniquely blend risk, uncertainty, potential profit and potential loss; by doing so, they
provide a cornerstone of the modern capitalist economy.
Investment : The basics of investing
 Types of investments
 Common investment terms
 Risk level of investments
 How taxes apply to investments
 Fees and costs of investments
Types of Investment:
•Some of the most common types of investments include the following:

•Annuity

•An annuity is a type of investment contract that pays you income at regular intervals, usually after retirement.

•Bond

•A bond is a certificate you receive for a loan you make to a company or government (an issuer). In return, the
issuer of the bond promises to pay you interest at a set rate and to repay the loan on a set date.
•Canada Savings Bond (CSB)
•A Canada Savings Bond is a savings product issued and guaranteed by the federal government. It offers a minimum guaranteed interest rate.
Canada Savings Bonds have a three-year term to maturity, with interest rates remaining in effect for that period. At the end of the period, the
Minister of Finance announces the new rates based on prevailing market conditions. It may be cashed at any time and earns interest up to the
date it is cashed.

•Canada Savings Bonds are only available through the Payroll Savings Program, which allows Canadians to purchase bonds through payroll
deductions.

•Learn about current interest rates and how to buy Canada Savings Bonds.​

•Exchange traded fund (ETF)

•An exchange traded fund is an investment fund that holds assets such as stocks, commodities or bonds. Exchange traded funds trade on stock
exchanges and have a value that is similar to the total value of the assets they contain. This means that the value of an exchange traded fund
can change throughout the day.

•The risk level of an exchange traded fund depends on the assets it contains. If it contains high-risk assets, like some stocks, then the risk level
will be high.
•Guaranteed investment certificate (GIC)

•A GIC is an investment that protects your invested capital. You will not lose money on the investment. GICs
can have either a fixed or a variable interest rate.

•Mutual fund

•A mutual fund is a type of investment in which the money of many investors is pooled together to buy a
portfolio of different securities. A professional manages the fund. They invest the money in stocks, bonds,
options, money market instruments or other securities.

•Security

•A security is a transferable certificate of ownership of an investment product such as a note, bond, stock,
futures contract or option.
•Segregated fund

•A pooled investment fund, much like a mutual fund, is set up by an insurance company and segregated from the
general capital of the company. The main difference between a segregated fund and a mutual fund is the
guarantee that, regardless of fund performance, at least a minimum percentage of the investor’s payments into
the fund will be returned when the fund matures.

•Stock

•A stock is a unit of ownership in a company which is bought and sold on a stock exchange. Stocks are also called
“shares” or “equities”.

•Treasury bill (T-bill)

•A T-bill is a short-term, low-risk investment issued by a federal or provincial government. It is sold in amounts
ranging from $1,000 to $1 million, and must be held for a fixed term which can range from one month to a year.
Common investment terms

•Before making investment decisions, it is important to understand basic concepts.

•Risk

•Risk is the potential of losing your money when investing, or the level of uncertainty regarding what you will
earn or lose on your investment.

•Almost every type of investment involves some risk. Generally, the higher the potential return, the higher the
risk.
•Return
•Return on your investment, also known as ROI, is the profit or growth that you make
on an investment. It can vary greatly. For some investments, it can't be predicted with
certainty.
•An investment’s return can come in two forms:
 Income, including interest or dividends. A dividend is a portion of a company’s profit
that is paid to its shareholders
 Increased value, also called “capital gain,” which lets you sell your investment for a
profit
•You can also have a negative return if your investment loses value. This is also called a
“capital loss.”
Risk tolerance

•Risk tolerance is how comfortable you are with risk and not knowing what you will earn or lose on your
investment.

•If you prefer little or no risk, you have a low risk tolerance, or are “risk averse."

•You have a high risk tolerance if you are willing to risk losing some or all of your investment in exchange for
the potential to earn more money.

•You can ask yourself the following questions to help determine your risk tolerance:

 when will you need the money

 do you have enough money set aside for an emergency and to cover debts
 is your job stable
 can you tolerate investments where returns may be unpredictable or subject to sudden changes in value
 how would you react if your investments declined in value
•Liquidity

•Liquid assets or investments are those you are able to cash in or sell quickly. Examples of liquid assets include
savings accounts and most stocks. A house is considered a non-liquid asset.

•Liquidity can be important if you are planning to use your savings or investments in the short term.

•Diversification

•Having a mix of investments in different asset classes is called diversification. This can help you to reduce risk.

•There are two ways to diversify your investments: portfolio diversification and asset allocation.
•Portfolio diversification means having a mix of investments to reduce risk. For example, having investments
in many companies instead of just one. When you hold a variety of investments, you reduce the possibility that
all of them will lose value at the same time. If you only own one stock and that company loses value, then you
risk losing all of the money you invested.

•Asset allocation means having different types of asset classes in your investment portfolio, for example:
stocks, bonds and cash. When you have different types of assets, you reduce the risk that all assets will lose
value at the same time. 
Risk level of investments

•Each type of investment option has its own level of complexity and risk. Before choosing an investment, it's
important to understand what level of risk you are comfortable with.

•The most common categories of investments have varying levels of risk.

• 
Low, or no, risk investments

•Savings-like investments are generally low-risk, or even no-risk, investments. This is because the capital, and
often the return, is guaranteed.

•Examples of savings-like investments include:

 guaranteed investment certificates (GICs)

 treasury bills
•Fixed-income securities are also considered low-risk investments.

•Examples of fixed-income securities include:

 government bonds
 corporate bonds
High-risk investments

•Equities, also called stocks or shares, are considered high-risk investments.

•The risk level of mutual funds and exchange-traded funds depends on the type of investment included in the
fund.

•Get an overview of different investment types in Investments at a glance, published by the Canadian Securities
Administrators
.