Name: _________________________________ Period ________ Date ____/____/____
Bond Analysis
Minds on the Markets
Module 03 – Lesson 5
1. Marketable Securities
1.1. Stocks and bonds are not just securities, but marketable securities, meaning __________
_________________________________________________________________________
1.2. We should recognize that an investor who intends to make a bond purchase can:
1.2.1. Buy ________________________________________________________________
1.2.2. Buy ________________________________________________________________
1.3. Scenario: ABC Corp issues a 15-year bond in 2005, before the Great Recession. To get
investors to buy its bond, it must offer a 6% coupon. By 2010, the Great Recession has
hit. The economy is struggling. Interest rates have fallen. ABC wants to raise more
money, so it sells 10-year bonds. In this environment, it only has to offer a 5% coupon to
get investors to purchase this bond.
1.3.1. If you place yourself in 2010, you can :
1.3.1.1. Purchase _____________________________________________________
_____________________________________________________________ .
1.3.1.2. Purchase _____________________________________________________
_____________________________________________________________
1.3.1.2.1.1. The owner of this bond, ______________________________
___________________________________________________
1.3.1.2.1.2. Put yourself in the owner’s shoes. Her bond pays $60 in
interest per year. Why should she sell it to you for the same
amount as a new bond that pays only $50 in interest per year?
1.3.1.2.1.3. She will sell it to you, but at a price ____________________
1.3.2. So, what’s the point?
1.3.2.1. The value of a previously existing bond is dependent on ____________
_____________________________________________________________
Name: _________________________________ Period ________ Date ____/____/____
1.3.2.2. Specifically, the value of a previously issued bond will _____________
when interest rates fall, and vice versa.
2. Term Structure is the study of __________________________________________________
_____________________________________________________________________________
3. Yield Curve is ________________________________________________________________
_____________________________________________________________________________
3.1. The type of bond whose yield curve is most closely studied is ___________________
3.2. It is used as a ____________________ for determining interest rates for other bonds.
3.3. Yield curves are more often described by _____________________________________
________________________________________The bonds with shorter maturity have
____________________________ yields and the longer maturity bonds have
__________________________________________________________ yields.
3.3.2. There is typically ____________________________________________________
risk associated with bonds with a longer term.
3.4. Negative, or inverted, curves are indicative of a _______________________________
economy where the market believes interest rates will __________________________
in the future.
4. Credit Differentials (Spreads): __________________________________________________
_____________________________________________________________________________
5. Junk Bonds
5.1. “Junk” bonds are a slang name for bonds issued by companies with ______________
_________________________________________________________________________
5.2. The junk bond should always have a yield than the investment grade bond because of
the_______________________________________________________________________
5.3. What is significant is the size of the spread?
5.3.1. A very “wide” spread indicates ________________________________________
___________________________________________________________________
5.3.2. Conversely, a very “narrow” spread indicates a __________________________ .
Investors are willing to _______________________________________________
___________________________________________________________________
Name: _________________________________ Period ________ Date ____/____/____
5.3.3. Typically in a recessionary economy, where consumer confidence is low,
investors tend to be more _____________________________________________
They _______________ their more risky bonds and _______________________
safer bonds. This causes spreads to _____________________________________
6. International Interest Rate Differential: The spread between _______________________
_____________________________ from other industrialized countries shows the relative
_____________________________________________________________________________
Name: _________________________________ Period ________ Date ____/____/____
7. Web Challenge #1: A measure for whether bonds are ultimately reliable is how many
default (ie: fail to pay because the company is unable). Research the default rate of
Investment Grade bonds as well as that of junk bonds. With this information, describe how
much riskier you believe junk bonds are.
8.
Web Challenge #2: Uncle Sam, the U.S. of A, is thought of as the strongest country in the
world. But the rate that investors demand to lend a country money is a direct indication of
how risky they believe it is.
8.1. Look up the Yield Curve for the United States, Germany, China and Japan. Which
country can borrow money for the lowest rate over 10 years? 30 years?
9. Web Challenge #3: Research the last time the U.S. Treasury Yield Curve was inverted. Try to
find when the curve first inverted and how long it lasted.
9.1. Research and document what was happening in the United States during this period of
time.