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8/13/2019 Bond Presentation Handout from Class
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Coupon Payments
Taxable
Tax-Free
Deferred
Zero Coupon Bonds
Frequency Corp Bonds every six months
Government Bonds six months
Mortgage-backed every month
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Credit Rating System
Credit Risk S&P Moodys Fitch
Prime AAA Aaa AAA
Excellent AA Aa AA
Upper Medium A A A
Lower Medium BBB Baa BBB
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Length of Loan
0Years
10Years
20Years
30 +Years
UltraShort
Short
Intermediate
LongTerm
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Ownership of Bonds
Bearer Bonds
Registered Bonds
Book Entry Bonds
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Inverse Relationship:
When Interest rates rise bond prices fall
When Interest rates fall bond prices rise
Interest Rate Risk
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Reinvestment Risk
In a declining interest rate environment,
you are forced to reinvest income or principal atthose lower rates
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Tomorrows dollar may have less purchasing power
Inflation Risk
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Some corporate, municipal and agency bonds have acall feature
Declining interest rates may accelerate theredemption of a callable bond
Call Risk
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May be unable to find a buyer or be forced to sell at
a significant discount to market value
Liquidity Risk
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For mortgage backed securities,the risk of declining interest rates,
or a strong housing market, willcause mortgage holders torefinance or otherwise repay their
loans sooner than expected
Prepayment Risk
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Treasury Notes & Bonds
Non-Callable
Tax Savings
Liquidity
Purchased through Bank, Broker or US Treasury
30 year Bonds discontinued in 2001- Still bought on open market & reintroduced02/ 09/ 2006
Notes issued in shorter terms of 2 years, 3 yrs, 5yrs, 7 yrs and 10 yrs
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Bought at a discount
Terms of 4 weeks, 13 weeks and 26 weeks
Auctions occur in Feb, May, August and November.
Bought through Banks, Brokers, at US Treasury
T-Bills
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TIPS
Term is ten years
Coupon is fixed
Interest Payments every 6 months
Inflation Adjusted Principal not
paid until maturity
Semi-annual interest payments basedupon inflation-adjusted principal
Taxes due every year on adjustedamount
Bought through your bank, broker or atthe US Treasury
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Significant Tax Benefits
Revenue Bonds Bridge Tolls
Sewer Bonds
General Obligation (GO) Bonds Full Faith & Credit of Issuer
Muni Bonds
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Secured or asset-backed bonds:
Mortgage Bonds
Equipment Trust Certificate
Collateral trust Certificate
Debentures:Not secured by property
Dependent upon assets and earning power of the issuer
Types of Corporate Bonds
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Federal National Mortgage Association (Fannie Mae)
Federal Home Loan Mortgage Association (Freddie Mac)
Government National Mortgage Association (Ginnie Mae)
Examples
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Current Yield Formula for Bonds
Annual Coupon Payment = Current Yield
Price of Bond
Example: $60.00 = 7.5% Current Yield
$800.00
Key Formulas
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Taxable Equivalent Yield (TEY) for Munis and Treasuries
Muni Yield/100% -28% Federal Tax Bracket = Taxable Equivalent Yield
Example: 4% Muni Yield/100 - 28 = 5.5 TEY
Treasury Yield/100% - State Tax = TEY for Treasuries
Example: 4% Treasury Yield/100 - 11 = 4.49
Key Formulas
Yield to Maturity Approximation Formula for Bonds:
( Annual Interest Payment + (Par Value-Current Bond Price)/ # of Years to Maturity )
divided by (Par Value + Current Bond Price)/ 2
Key Formulas
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When the bondholder pays:
Less than par value- (discount) Yield to maturity>Current Yield > Nominal Yield
Par Value- Nominal Yield = Current Yield=Yield to Maturity
More than par value- (premium) Nominal Yield > Current Yield > Yield to Maturity
Summary of Bond Yield Relationships
Stability
Diversification
Income
Why Own Bonds-Lending vs. Owning
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WSJ
http:/ / treasurydirect.gov
www.investinginbonds.com
www.bondsonline.com
Moody's
Standard & Poor's
Where to go for information
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The End
Seeing Is Not Believing
W hich gray circle is bigger? Which gray bar is longer? Are the gray horizontal lines parallel?
2009 Morningstar, Inc. All rights reserved. 3/1/2009
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Rational Minds Can Act Irrationally
2009 Morningstar, Inc. All rights reserved. 3/1/2009
They are the same size They are the same size The horizontal lines are parallel
Keys to Successful Investing
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Set Guidelines that Work
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Philosophy determines direction
Learn to Pay Yourself First:
#1 Error:Failure to set Financial Goals
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When should you start to payyourself?
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Immediately!
When should you start to payyourself?
According to Bureau of Labor Statistics
Average Consumer spends $5.60 per day on
non-alcoholic beverages
Over 40 years, at an average stock market return,
this equals $______________
Drinking your retirement away?
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According to Bureau of Labor Statistics
Average Consumer spends $5.60 per day on
non-alcoholic beverages
Over 40 years, at an average stock market return,
this equals$904,659.18
Drinking your retirement away?
When to start your retirement savingsplan?
NOW!
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The value of starting your retirementsavings now
Age Years Amount Rate Balance
25 40 $3,000.00 10.00% $1,327,777.00
45 20 $23,182.00 10.00% $1,327,777.00
50 15 $41,790.00 10.00% $1,327,777.00
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Are you protecting your current income and future income?
- Look at all aspects of risk including disability, life insurance, medical, liability coverage, LTC.
Fund your retirement before your children's education
Be careful about paying off your home mortgage faster
Prioritize your financial goals
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Develop a long-term InvestmentPerspective
There Have Always Been Reasons Not to InvestWorld Events
Black TuesdayCrash of New
York StockExchange
10/29/29
2003PresentOperation
IraqiFreedom
2008GlobalCredit
Meltdown
KoreanConflict
195053
10/24/29Black Thursday
Plunge of New YorkStock Exchange
1962CubanMissileCrisis
193945World War II
197981Iran
HostageCrisis
1988Savings &
LoanCrisis
10/27/97Bloody Monday
Fall of Dow JonesIndustrial Average
Vietnam War(U.S. Engagement)
196473
Black MondayFall of Dow JonesIndustrial Average
10/19/87
OperationDesertStorm
1991
SubprimeLending
Crisis
2007
Attacks onthe World
Trade Centerand Pentagon
9/11/01
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Most Years Have Been Positive
HISTORY FAVORS A RETURN TO THE MEAN
Calendar Year Returns for the S&P 500 Index, 19262011
This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index.
Past performance does not guarantee future results.
76
The Same Goes for Decades
HISTORY FAVORS A RETURN TO THE MEAN
10-Year Rolling Returns for the S&P 500 Index
This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index.
Past performance does not guarantee future results.
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The Five Worst 10-Year Roll ing Periods
What Happened Next?
HISTORY FAVORS A RETURN TO THE MEAN
S&P 500 Index Worst 10-Year Returns and Subsequent 10-Year Returns
This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged and one cannot invest directly in an index. Since no subsequent 10-year results are available
for years past 2001, only the 10-year period ended 2008 was included to demonstrate that the next 10 years are still unknown. For the 10-year
periods ended 2009, 2010 and 2011, the S&P 500 Index returned -0.95%, 1.41%and 2.92%, respectively.
Past performance does not guarantee future results.
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Maintaining your buying power
Understanding the real risk to yourfinancial well-being
Longevity Risk
Age
Years
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Inflation Shrinks Your Buying Power
1991
2011
2031
$0.29
$0.44
$0.72
U.S. Stamp
$15,473
$25,245
$41,313
New Car
$16,276
$28,500
$46,640
College Tuition
$2.80
$3.57
$5.83
Gallon of Milk
Inflation Risk
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Concentrated positions
Market timing
Overconfidence
Would you rather have $2 million or $1.7 million inyour retirement portfolio?
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Scenario 1:
Married couple
Husband 65-Wife 62
$2,000,000 in total assets
$60,000 withdrawn/annually from portfolio
50% Concentrated Portfolio, the rest invested 60/40
Keep Principal Intact
Concentrated Portfolio
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Scenario 150% Concentrated Portfolio
35% Failure rate
Diversified Portfolio
Scenario 2:
Married couple
Husband 65-Wife 62
$1,730,000 in total assets
$60,000 withdrawn/annually from portfolio
Rebalanced Portfolio 60/40
Keep Principal Intact
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Scenario 2Diversified 60/40 Portfolio
3% Failure rate
Asking the right question could bethe key to your success
Would you rather have a 35% failure rate or a
3% failure rate in your retirement portfolio?
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Dangers of Market Timing
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Performance of the S&P 500 IndexDaily: January 1, 1970-December 31, 2011
Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2011 provided by Bloomberg.The S&P data are provided by Standard & Poors Index Services Group. US bonds and bills data Stocks, Bonds, Bills, and Inflation Yearbook, Ibbotson Associates,Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional FundAdvisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliableand current, but accuracy should be placed in t he context of underlying assumptions. This publication is distributed for educational purposes and should not be consideredinvestment advice or an offer of any security for sale. Past performance is not a guarantee of f uture results. Unauthorized copying, reproducing, duplicating, or transmittingof this material is prohibited.Date of first use: June 1, 2006.
LT1330.8
$50,662
$45,431
$32,940
$19,130
$12,068
$9,190
Growthof$1,000
Tot al Period Missed 1Best Day
Missed 5 BestSingle Days
Missed 15 BestSingle Days
Missed 25 BestSingle Days
One-MonthUS T-Bills
AnnualizedCompound Return 9.80% 9.51% 8.68% 7.28% 6.11% 5.42%
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Time periods greater than one month are based on monthly rolling periods, and dates indicated are end of period.The S&P data are provided by Standard & Poors Index Services Group.Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information containedherein is compiled fromsources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed foreducational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of futureresults. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.Date of first use: June 1, 2006.
LT1330.8
Performance of the S&P 500 IndexDaily: January 1, 1970-December 31, 2011
The best single day was October 13,
2008.
The best one-month return, October
1974, happened immediately after the
second-worst one-year period.
The occurrence of strongly positive
returns has been especially
unpredictable. Investors attempting to
wait out an apparent downturn ran a
high risk of missing these best periods.
Nine of the top 25 days occurred
between September 2008 and February
2009, during which time the S&P
dropped 41.8%
Five of the Top 10 days occurred
between October 2008 and November
2008, during which time, the S&P 500
dropped 21.5%.
0%
2%
4%
6%
8%
10%
12%
14%
Day Month 3 MonthsEnding
6 MonthsEnding
12 MonthsEnding
10/13/08 10/74 10/82 6/75 6/83
10/19/87 10/87 11/08 2/09 2/09 Worst Periods andthe Return IfMissed
Best Periodsand the ReturnIf Missed
Best/Worst Missed Period
Total Period
9.51% 9.40% 9.18% 8.89% 8.56%
11.29%11.22%10.72%10.43%10.36%
9.80%
AnnualizedCompoundReturns%
Indices arenot availablefor direct investment; itsperformancedoes notreflect theexpenses associated with themanagement of an actualportfolio. Past performanceis no guarantee of futureresults. TheS&P data areprovided by Standard & PoorsIndexServices Group.Bull andbear markets aredefinedin hindsightusingcumulativemonthlyreturns.A bear market(1) beginswithanegativemonthlyreturn,(2) must achieve a cumulative returnlessthanor equalto -10%, and (3)endsat themostnegative cumulative returnprior toachieving a positivecumulativereturn. Alldatapoints which arenot considered partof a bearmarketare designated asa bullmarket.
Bull and Bear MarketsS&P 500 Index (USD)
Monthly Return s: January 1926June 2011
6 mos.-30%
2 mos.-19%
6 mos.-21%
4 mos.-10%
44 mos.
193%
2 mos.
92%6 mos.
100%3 mos.
26%4 mos.
12%
34 mos.-83%
23 mos.
133%9 mos.
61%5 mos.
22%
13 mos.-50%
4 mos.-16%
31 mos.-30%
6 mos.-22%
49 mos.210%
116 mos.491%
5 mos.12%
48 mos.105% 43 mos.
90%26 mos.
52%
7 mos.-10%
5 mos.-15%
6 mos.-22%
6 mos.-22%
30 mos.76%
9 mos.55%15 mos.
35%
19 mos.-29%
33 mos.86%
21 mos.-43%
3 mos.-11%
14 mos.
-14%
20 mos.-17% 3 mos.
-30%
5 mos.-15%
2 mos.-15%
25 mos.-45% 16 mos.
-51%
61 mos.282%
92 mos.355%
30 mos.71%
24 mos.63%
61 mos.108%
Feb 2009
Jun 2011-8%
Months = Duration of Bull/Bear Market% = Total Return for the Bull/Bear Market
Average Duration
Bull Market: 32 MonthsBear Market: 11 Months
Average Return
Bull Market: 119%Bear Market: -27%
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Thinking you are smarter than the market
Missing Opportunity
Strong performance among a few
stocks accounts for much of the
markets return each year.
There is no evidence that managers
can identify these stocks inadvanceand attempting to pick
them may result in missed
opportunity.
Investors should diversify broadly
and stay fully invested to capture
expected returns.
9.6%
6.2%
-0.7%
All US Stocks Excluding the Top10%
of Performers
Each Year
Excluding the Top25%
of Performers
Each Year
Compound Average Annual Returns: 1926-2011
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Creative Destruction
Failure to understand Capitalism
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Allowing Uncle Sam to determine yourportfolio structure
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Splitting your investment exactly as the assets are offered
Way too much in company stock
Naive 401k Investing
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Allocation of various retirement plans:
TIAA-CREF: One Stock Fund, One Fixed Income
50/50 Stock/Bond
TWA Pilots: Five Stock, One Fixed Income
75/25 Stock/Bond
University of California: One stock, Four Fixed Income
34/66 Stock/Bond
Naive 401k Investing
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Tip shopping
Investing based upon your
(buddy, family CPA, Stockbroker) hot idea
Avoid chasing the hot stock
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Loss Aversion is a documented phenomenon
We all hate to admit our mistakes
Understand the mathematics of losses
50% loss means 100% gain to breakeven
80% loss means 400% gain to breakeven
"Get-Evenitis"
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96% of new money in 1999 was invested in Technology or Growth Stocks
85% of new money in 2002 was invested in Bond Funds
2006-2007 International Funds were the hot item
Herding Effect
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Market
ReturnInvestor
Return
Investor
Misbehavior
Gap
Investor Misbehavior
Benchmark Returns & Inflation
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Average Mutual Fund Retention Rates
3.29 3.09
4.42
0
1
2
3
4
5
Equity Fixed Income Asset Allocation
Average Mutual Fund Retention Rates
(Based on 20 - Year Analysis)
Y
ears
Annualized 20 Year Investor Returns
3.49 %
7.81 %
0.94 %
6.5 %
0
1
2
3
45
6
7
8
9
Average Equity
Investor
S&P 500 Average Fixed
Income Investor
Barclays Aggregate
Bond Index
Annualized Investor Returns vs. Benchmark
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The cost of misbehaving
$100,000.00 invested
Market returns $ 449,967 over the last 20 years ending 2011
Investor returns = $198,594
Misbehavior Gap cost $251,372 InvestorReturn
$198,594
Market
Return
$449,967
InvestorMisbehavior Gap
$ 251,372
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A conservative method to address many of these issues we have covered tonight
A conservative method to address many of these issues we have covered tonight
What assets should you include in your portfolio?
How much should you have in stocks, bonds, real estate, cash.etc.
When should you rebalance?
Where does your home fit in your financial picture?
How does your IRA, 401k etc., fit into this picture?
Economic Hedging
Cash BondsDomesticEquities
InternationalEquities
Real Estate(REITs)
Gold/
Commodities
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