Stock Market Game Week in Review

The Stock Market Game is a curriculum-based teaching tool that allows students to invest a hypothetical $100,000 online stock portfolio to learn about long-term saving and investing.

From the disturbing chimp story to the disappointing news regarding A-Rod, Americans are in need of some good news for a change (especially after former Fed Chairman Greenspan called for an overhaul of the entire financial system earlier this week). It appears the bond market may provide just that. (Don't miss " Kass: Choosing Bonds Over Equities.")

According to MarketWatch columnist Mark Hulbert the spread between yields on Treasuries and municipal bonds (or "munis") is narrowing, which may be good news for the broader economy. Hulbert feels investors are slowly moving away from Treasuries (which many investors flock to in a down market) and are assuming more risk by testing out the waters with munis. Hulbert writes, "If this trend continues, it would signal the market's return to its 'normal' function of pricing various securities according to their intrinsic worth, in which it properly discriminates between securities of higher and lower quality."

The positive news continues with an additional boost from President Obama's economic stimulus package, as it includes measures to expand the use of municipal bonds. They would be used to fund the transportation, housing and education projects the stimulus seeks to start. The Wall Street Journal reported this week that high-yield bonds (a.k.a. junk bonds) are gaining favor with investors after a poor showing in 2008. Individual investors have invested $4 billion in mutual funds that hold high-yield bonds since November of last year. Trading of corporate bonds is also on the rise as of late. The Financial Industry Regulatory Authority ( FINRA) reports an average of $17.1 billion of corporate bonds is being traded daily this month, an increase from the $9.4 billion low in August of last year.

For those just joining the program, The Stock Market Game has recently added the trading of bonds in some states (check with your local coordinator to see if they are offered in your area). Your students (and perhaps some of you) may be interested in learning about them as a possible investment strategy in this turbulent market.

Let's start with the basics. What are bonds?

Bonds are loans investors make to the issuers in return for the promise of being paid interest, usually, but not always, at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Bonds have a reputation as a dull investment, in part because they are less volatile than stocks and produce a lower long-term return than stocks. But in the current economy, they have become much more attractive as an investment option.

While all bonds share basic characteristics, such as terms, rates and par values (the face value, or named value of the bond -- usually $1,000), they are not all alike. One of the major differences is that they're issued, or sold, by four distinct entities in the U.S.

  • Corporations issue bonds to raise money for expansion, research and development, and other expenses of doing business. While corporations can also raise money by selling new shares of stock, they may prefer bonds because the existing shares lose value when new shares are issued.
  • Municipal governments, such as states and cities, sell bonds to fund projects for the public good like building bridges, sewers, roads and schools.
  • The U.S. Treasury issues bonds to meet its regular and unusual obligations.
  • And finally, government agencies issue bonds to raise money to provide mortgages and student loans.
  • Click here to view a video discussing differences between Treasury and agencies securities.

    For more information about bonds, check out our What is a Bond? lesson in the Teacher Support Center. To access the lesson, click "Lessons & Activities" (in purple), search by keyword "bonds," and make sure to select "no" after "core."

    To learn more about The Stock Market Game, visit www.stockmarketgame.org.

    RealMoney Barometer Poll
    1 What would best describe your stance heading into the coming week of trading?
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    2 Which of these sectors do you think is set to move up in the coming week?
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    This article was written by a staff member of The Stock Market Game.

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