Question

2.

a. Discuss four different classes of bonds and define the characteristics of each. Which class of bonds tends to have the least amount of risk and why?

Answer 1

1.Treasury Bonds

U.S Treasury Securities (Treasuries) are Federal Government issued. This is being used to finance budget deficits. This type of bond is credit-risk free because of government support. Their yields are always going to be lowest. In economic fluctuations they perform better than higher-yielding bonds. Treasury bonds are on the lower part of the spectrum when it comes to making profit.

2. Other US Government Bonds

These bonds are agency bonds. These agencies are Fannie Mae and Ginnie Mae . These bonds are yield higher than US treasury bonds .You can easily buy and sell this type of bond. These are low risk bonds. These bonds are not exempt from federal and state income taxes.

3 .Municipal Bonds

Often called “Munis”. These bonds issued by states, cities, and other government entities. These bonds are being used to raise money for specific expenditures. These expenditures are for the construction of highways, bridges and schools.

You lend money to the state or local government when you buy a municipal bond. The interest for these bonds have semiannual payments. These bonds have maturities that ranges from 2-5 year for short term and 30 years for long term.

4. Foreign Bonds

Foreign bonds exposes you to a mixture of risks depending on the country of purchase. Sovereign risk includes a nation’s political, cultural, environmental and economic characteristics. Investing on foreign bonds exposes you to currency risk as well.

The changes in currency rate can increase or decrease your investment return.

You can buy and sell some Foreign bonds and pay the interest in U.S Dollars. These are the Yankee bonds. International banks issue these kinds of bonds.

Question 2

Treasury bonds

Treasury bonds are sold by the federal government. Because they are backed by Government, Treasurys have practically no default risk and are the safest bonds to buy.