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Agency Bonds

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Agency bonds or agency issues are debt securities issued by either Government Sponsored Enterprises (GSEs) or Federal Government agencies which may issue or guarantee these bonds. GSEs are usually federally-chartered but privately-owned corporations such as FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation) . Government agencies include the Small Business Administration, GNMA (Government National Mortgage Association), and the FHA (Federal Housing Authority) . A key difference here is that securities issued by GSEs are not direct obligations of the US Government, while those issued or guaranteed by GNMA (Ginnie Mae) , the SBA , and the FHA are guaranteed against default just like T-Bills, T-Notes, and T-Bonds. Agency securities tend to promote a public purpose. For example, FNMA and FHLMC purchase mortgages from lenders, which encourages lenders to make more loans and increase home ownership. Similarly, the Federal Farm Credit

Sinking Fund

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Bonds pay interest-only until the end of the term. Since the issuing corporation must return the principal value of the bond at some point, they usually establish what's known as a sinking fund . With this sinking fund established, the company would be able to return the principal or complete a "call." Having this money set aside can only help the rating by S&P and Moody's, too. Some bonds especially municipal bonds are es-crowed to maturity , which means the funds needed to retire the bond issue are already parked in a safe, interest-bearing account holding Treasury securities . Having the debt service covered by a verifiable escrow account tends to make such bond ratings AAA and easy to sell on the secondary market. His rate of default on high-yield corporate bonds has ranged in recent years from about 1% to 13%. On the other hand, the rate of default on U.S. Treasury securities has remained at zero, going all the way back to when Alexander Hamilton first is

Corporate Bonds

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In a notice to investors, the SEC explains that, "Companies use the proceeds from bond sales for a wide variety of purposes, including buying new equipment, investing in research and development, buying back their own stock, paying shareholder dividends, refinancing debt, and financing mergers and acquisitions." A default on a municipal bond is a rare thing, but corporations can end up unable to pay the interest on their bonds or return the principal at maturity and thereby go into default.  To protect bondholders from this, Congress passed the Trust Indenture Act of 1939. Under this act if a corporation wants to sell $5,000,000 or more worth of bonds that mature in longer than one year, they must do it under a contract or indenture with a trustee, who will enforce the terms of the indenture to the benefit of the bondholders. In other words, if the issuer defaults, the trustee can move to forcibly sell off the assets of the company, so bondholders can recover some of their m

Fixed-Income Securities "Types and Characteristics"

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Insurance-based products provide financial protection. Investments in money market securities provide a rainy-day fund that earns interest and can be tapped in an emergency without having to sell at a loss. To earn higher rates of return, investors purchase longer-term debt securities. Businesses borrow money short-term by issuing money market securities. To borrow from investors long-term, companies issue fixed-income securities that are usually called bonds. Businesses sell stock to some investors and bonds to others, forming their capital structure. Equity investors are owners; bond investors are loaners. Loaners are creditors who must be paid their interest and principal on time but don't get a vote in corporate management decisions. Owners don't have to be paid anything, but their potential reward is much bigger than those who buy the company's bonds. For the issuing company, there are advantages and disadvantages to both types of financing. Equity financing gives the

Certificates of Deposit (CD)

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To earn a higher interest rate than what their bank offers on savings or checking accounts, many bank customers put relatively large amounts into certificates of deposit or CDs. These are long-term deposits that pay higher rates of interest if the depositor agrees to leave the funds untouched during a certain time frame. CDs are typically offered in terms of three or six months, and for as long as one, two, three or five years. Those are typical terms, but savers can find certificates of deposit with terms as short as seven days or as long as 10 years. Obviously, the bank would have to entice someone with a higher rate to get him to agree to leave a large deposit untouched for 10 years. And, a saver, on the other hand, could not expect a high rate of return when locking up funds for a mere seven days. Investors agree not to withdraw funds until the CD matures , which is why CDs usually offer higher yields than a regular savings account. As with any fixed-income investment, rates typic

Municipal Notes ... it is Tax-Exempt / Tax Free

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We'll look at municipal securities in a moment, but for now just know that cities, counties, and school districts can borrow money long-term by issuing bonds, and they can borrow short-term by issuing anticipation notes . For example, property taxes are collected twice a year.  If the city wants some of that money now, they can issue a tax anticipation note, or TAN . If it's backed by revenues from sewer and water services, for example it's a revenue anticipation note, or RAN . If the note is backed by both taxes and revenues, they call it a tax and revenue anticipation note, or TRAN. Through a bond anticipation note or BAN the issuer borrows money now and backs it with part of the money they're going to borrow when they issue more bonds. The interest paid on these municipal notes is lower than the nominal rates paid on a corporation's commercial paper, but that's okay the interest paid is also tax-exempt at the federal level. So, if an investor or an institu

Commercial Paper

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Commercial paper is typically used by companies as a source of working capital, receivables financing, and other short-term financing needs. To build major items such as an $800 million factory, a company generally issues long-term bonds (funded debt), and pays the lenders back slowly. But if Microsoft needs a mere $50 million for a few months, they would probably prefer to borrow it short-term at the lowest possible interest rate. If so, they issue commercial paper with a $50 million face amount, selling it to a money market mutual fund for, say, $49.8 million. Again, the difference between the discounted price and the face amount represents the interest earned by the investor. Commercial paper is generally issued only by corporations with high credit ratings from S&P, Moody's, or Fitch. Commercial paper could be described as an unsecured promissory note, as opposed to the BA we just examined, which provides collateral to the lender. Some large corporations issue their comm

Bankers' Acceptances ... is it an investment instrument?

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A bankers' acceptance is a short-term credit investment created by a non-financial company and guaranteed by a bank as to payment. "BAs" are traded at discounts to face value in the secondary market. These instruments are commonly used in international transactions, and might associate them with importing and exporting. As with a T-Bill, bankers' acceptances are so short-term it would make no sense to send interest checks to the buyer. Instead, these short-term debt securities are purchased at a discount from their face value. The difference between what we pay and what we receive is the interest income. The BA or bankers' acceptance is backed both by a bank's full faith and credit and the goods being purchased by the importer.

Start to Invest in T-Bills (safe Invest)

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T-Bills are short-term obligations of the United States Treasury, which means they are as safe as the money in your pocket. But, unlike the money you carry around, T-Bills earn interest. Guaranteed interest. That's right, the interest and principal are guaranteed, and the U.S. Treasury has never defaulted. So, if you don't need to withdraw a certain amount for several months or longer, you can buy the 3-month or 6-month T-Bill and usually earn higher yields than you'd earn in a savings account. There are no fees to buy T-Bills if you buy them directly through www.treasurydirect.gov . Bank CDs usually yield about the same as T-Bills, but the bank's FDIC insurance stops at $250,000 per account. T-Bills, on the other hand, are guaranteed no matter how large the denomination. Any given Monday T-Bills are available by auction through the website mentioned above from as small as $100 par value to as large as $5 million. No matter how big the bill, it's guaranteed by the U

All things you must to know about Annuities investment (Invest Safe)

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An annuity is an investment sold by an insurance company that either promises a minimum rate of return to the investor or allows the investor to allocate payments to various funds that invest in the stock and bond markets. These products offer regular payments for the rest of the annuitant's life, but owners of annuities can instead take money out as lump sums or random withdrawals on the back end. Annuities are part of the retirement plans of many individuals, and they can either be part of the safe-money piece or can provide exposure to the stock and bond markets. The three main types of annuities are fixed , indexed , and variable. - Fixed annuities A fixed annuity promises a minimum rate of return to the investor in exchange for one big payment into the contract or several periodic purchase payments. The purchase payments are allocated to the insurance company's general account, so the rate of return is "guaranteed." But, that just means it's backed by the c

Financial Statements and Footnotes

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Many successful businesses are privately owned. Five Guys and Toys R Us, for example, are well known companies, but we would have to estimate their revenue, expenses and profits since private companies do not report their financial results to the public. By comparison, if we want to know the revenue and net income after tax for Starbucks or Microsoft, we can go to the SEC's EDGAR site and pull up the company's most recent quarterly or annual reports. It's not that Five Guys and Toys R us do not have income statements, balance sheets, and statements of cash flows. They do not publish their financial statements. Starbucks, Microsoft, and McDonald's, on the other hand, are reporting companies who must disclose all relevant information to the investing public, even to those who will never invest in their stock. An issuer of securities can only pay the interest on their bonds if they have enough revenue to cover it. The preferred stockholders will only get paid

Balance Sheet

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When applying for a loan, the lender wants to know two important things: how much money does the borrower make ?, and what kind of collateral does he have? The borrower could submit a statement of cash flow showing all sources of income minus expenses. But the lender would also like to see what kind of assets he is holding minus his liabilities. The basic formula for the balance sheet is expressed as: Assets = Liabilities + Stockholders' Equity or Assets — Liabilities = Stockholders' Equity Assets represent what a company owns . Liabilities represent what a company owes . We take what a company owns, subtract what it owes, and that is the net worth of the company. Another name for net worth is stockholders' equity Assets Assets are divided into three types.  The first type is current assets . Current assets represent cash and anything that could be converted to cash in the short-term: cash & equivalents, accounts receivable, and inventory. Cash is cash, and it's

Statement of Cash Flows

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Some subtractions on the income statement do not involve an outlay of cash. Depreciation and amortization spread an asset's historical cost over an estimated useful life, but no cash is being spent when we record the expense on the income statement. Therefore, since there's a difference between an accounting entry called "depreciation" and actual cash being spent, analysts ignore intangible expenses like that when focusing on cash flow, which is how much cash is being generated (or consumed) by a company. One way to estimate cash flow is to take the net income from the income statement and then add back two non-cash charges: depreciation and amortization. Companies that invest in expensive factories, warehouses, and equipment can show quite different figures for net income on the one hand and cash flow from operations on the other. When they add back the depreciation that reduced their net income, their cash flow is a much higher amount. In the issuer's 10-K, we

Income Statement

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An income statement show the sales and profits are increasing, decreasing, or flattening . it can also be referred to as a "statement of earnings" or "statement of operations," it is available to anyone who wants to see it. That includes the company's competitors, which is a reason many companies stay private. For example, if Five Guys is in secret talks to acquire another fast food chain, they would rather keep that quiet as opposed to letting McDonald's see their plans and maybe try to out-bid them. On the other hand, if McDonald's is planning to open a certain number of restaurants in Africa next year, they would have to let the investment world know about it either on their next scheduled filing or by releasing an 8K. If you go to your favorite financial website or search for a company's "10¬K" or "annual shareholder report," you can see the financial statements for companies such as Microsoft, Oracle, and Starbucks. For n

Monetary and Fiscal Policies

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Economic policy makers use monetary and fiscal policies to influence the economy.  Monetary policies are enacted by the Federal Reserve Board and its Federal Open Market Committee . Monetary policies involve setting targets for short-term interest rates to either fight inflation or stimulate a sagging economy . The Federal Reserve Board (The Fed) requires that its member banks keep a certain percentage of their customer deposits in reserve. This is called the reserve requiremen t. If the Fed raises the reserve requirement, banks have less money to lend out to people trying to buy homes and start businesses. So, if the economy is overheating, the Federal Reserve Board could raise the reserve requirement to cool things down, and if the economy is sluggish, they could lower the requirement to make more money available to fuel the economy. However, of the three main tools of monetary policy changing the reserve requirement is the most drastic measure and, therefore, the tool used least

GDP and Business Cycle

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People often talk about the economy in terms of whether it is good or bad. But, how do we measure something as big and complex as the American economy? One way is by tracking Gross Domestic Product (GDP) . As the name implies, Gross Domestic Product measures the total output of a nation's economy. It's an estimate of the total value of all goods and services produced and purchased over a three month period. If the GDP number comes in at 3%, that means the economy grew at an annual rate of 3% over the financial quarter. If GDP is 2%, the economy is shrinking at an annual rate of  2%. The GDP numbers that are factored for inflation are called "real GDP." Gross Domestic Product (GDP) Business Cycle . Measures the value of goods and services produced and provided by workers stationed in the United States over a financial quarter. If GDP is increasing, the economy is growing. If GDP is declining, so is the economy. The American economy is subject to the business cycle

Economic Indicators

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People often talk about the economy in terms of whether it is good or bad. But, how do we measure something as big and complex as the American economy? One way is by tracking Gross Domestic Product (GDP) . As the name implies, Gross Domestic Product measures the total output of a nation's economy . It is an estimate of the total value of all goods and services produced and purchased over a three-month period . If the GDP number comes in at 3%, that means the economy grew at an annual rate of 3% over the financial quarter. If GDP is - 2%, the economy is shrinking at an annual rate of - 2%. The GDP numbers that are factored for inflation are called "real GDP." The Federal Reserve Board monitors many economic indicators to determine whether inflation is threatening the economy, or whether the Fed needs to provide stimulus to a sagging economy. The following employment indicators reveal how many people are working and how much compensation they're receiving. If people are