 Hello and welcome to this session. This is Professor Farhad in which we would look at asset classes, specifically the bonds market. This topic is covered on a CPA BEC section exam, CFA exam, as well as an essential or principle of investments, whether it's an undergraduate or graduate course. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, subscribe to the channel. If they help you, they might help other people and connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting or your finance education, especially if you are studying for the CPA or the CFA exam. We break down asset classes into three categories, which are fixed income, equity and derivatives. Fixed income is broken down into two sub categories, money market or short term and capital market, which is long term. In the prior session, we covered the money market. In this session, we'll cover the capital market. The capital market is simply called, sometimes called the bond market or fixed income capital market is composed of longer term borrowing or debt securities than those that are traded in the money market. So when we say money market and what we covered in the prior session, money market, money market implied short term. You're investing the money for usually less than a year. When we look at the bond market or the fixed income capital market or the capital market, we're looking at longer term investments. What could be examples? What can we invest in as long term, long term capital market or fixed income? We're looking at treasury notes and bonds, which is basically Uncle Sam corporate bonds. When we lend money to corporations, private corporation, money bonds, money and state bonds for that matter. When a governmental unit raises money, mortgage backed securities, which we talked about a little bit in prior sessions and federal agency debt. Those all these bonds promise a fixed amount of income, stream of income or some stream of income that's determined by a formula. That's usually how it works. When you lend money, they either promise a specific amount or they, what they do is, is they will say it's based on some sort of a formula based on the T bill rate plus 2% based on LIBOR plus a certain percent. Let's start by looking at treasury notes and bonds. And what are treasury notes and bonds? They are debt obligation of the federal US government. So Uncle Sam is O and U money, but this money has a maturity of one year or more. And there are two types. We have the T notes are issued for up to 10 years. When you say T notes like a loan, it's for up to 10 years. And we have T bonds, treasury bonds, those are from 10 to 30 years. And if it's less than one year, remember we talked about this, it's T bill or just simply put bill, which we talked about in the prior session. Both may be issued in the increment of $100. If they come, you can, you know, lend the government $100, but they're commonly, they commonly come in the denomination of $1,000. So practically anyone can participate in these bonds and they usually pay interest on a semi-annual basis. It means twice a year they pay interest. The interest is called the coupon. And the reason it's called a coupon, it's because before computers existed, when you bought those T notes and T bonds, you had a piece of paper, you had a piece of paper and you had to clip the bond. So attach that piece of paper as a coupon. And what you do is you show the coupon and they will give you the payment based on that coupon. Let's take a look at this bond to illustrate the concept of how we read bonds. This bond, we're going to look at this bond as an illustration. This bond mature in 2020, specifically May 31st, 2020. So if you lend the government money a long time ago, I don't know, because remember bonds, they go from 10 to 30 years. On May 31st, 2020, you're going to get back the par value or sometime it's called the face value. So if let's assume you bought one bond for $1,000, you're going to get your $1,000 back. This is how much you will get if you wait until May 31st, 2020. This bond pays 1.5%. This is called the coupon rate. What does that mean? It means if you have a bond, you multiply it by 1.5% per year, you will get $15 per year. Now, this payment will be broken down usually into two annualized installment, $750 and $750. Now, we need to understand the bid and the ask. What is the difference between the bid and the ask? And this is from a dealer perspective. Bonds are traded as a percentage of the price. So this is the price. This is the bid price. And this is the ask price. Bid price, it means if the dealer wants to buy the bond from you, they will pay you 100.347%. If they want to sell it to you, they will sell it to you for 100.3203%. What does that mean? Let's take a look at this in a moment. So the bid price is this much, 100.3043. So the bonds are traded in the domination of a thousand. So if you have one bond, we're going to assume one bond for a thousand. Prices are quoted as a percentage, of course. So you'll take a thousand. So the bid price, they will buy it from you. They will buy it from you for a thousand. If you have one bond times 100.3047, they will buy it for $1,003 and I'm going to round 0.47. Let's make it five pennies. They don't usually round that I'm going to round because it's one bond. If they want to sell you this bond, if they want to sell you this bond, it's a thousand dollar and they will sell it to you. The price is 100.3203. It's $1,003 and approximately 20 pennies. The difference between those two is 15 pennies and this is the commission or the spread between the bid and the ask price that the dealer makes because the dealer want to buy it, they will bid it. The bidding price is lower than the ask price because when they want to buy it, they want to buy it at a lower price and sell it at a higher. That's how they make the profit. The change column, it means 0.1719. That's a percentage change based on the year to maturity that's earning yield yield to maturity is 1.394. Now, what is the yield to maturity? We're not going to cover the yield to maturity now, but you just want to have an idea what's the yield of maturity. The yield to maturity is the measure of the annualized rate of return to an investor who buys the bond for the ask price and hold it until maturity. Hold on a second. Are you saying that I will earn 1.394 percent on this bond if I buy it, but the bond pays 1.5? It doesn't make any sense. Yes, it does. Remember, you're buying the bond for $1,003.20. You are not buying it for $1,000. The 1.5 percent is based on $1,000. So when we computed this $15, I said 1,000 times 1.5 percent. But if you buy the bond today, you're going to be paying $1,003.20. Now, why am I paying more? This bond is selling at a premium. Premium means you are paying more than $1,000, more than its face value. Now, why would you do so? Because of changes in interest rate, because of topics we have to discuss later on. All you have to know now is how to read the bid, how to read the ask, and the coupon. We'll talk about bonds much more in details, believe me. Later on, we find exactly how to compute this yield 1.394, and how do we come up with this change in the yield from the prior closing day? Another type of bond is inflation-protected treasury bond, because remember, in the economy, we have inflation. That means as inflation goes up, your purchasing power loses value. So if you have $100 today, this $100 today, if you go to a coffee shop, and if the coffee is for $2 a cup of coffee, you can buy 500 cups of coffee. Let's assume you still have this $1,000, and now the cups of coffee became $4 to make it simple. You still have the same money. Now you can only buy 250 cups. So your $1,000 lost value. Why did it lose value? Because of inflation. Because if inflation is higher, then all the prices are higher, the same amount of money buys you less. So what happened? The government says, guess what? We are going to create a bond, and that's going to be inflation-protected. It means if inflation goes up by 1% per year, we'll pay you 1% more per year. But listen to this. If inflation goes down 1%, we'll pay you less 1%. So those are inflation-protected treasury bond. Treasury means government bond. Bonds that are linked to an index of the cost of living in order to provide their citizen with an effective way to hedge inflation risk. And we do have this in the U.S. based on the inflation rate. So the consumer index, the consumer CPI, the consumer price index, we have something in the U.S. called CPI. If CPI goes up and you have a bond, your rate will go up. If it goes down, your rate will go down. And in the United States, for the past decade, more than a decade, we practically have no inflation. So in the U.S., inflation-protected treasury bond, they're called TIPS for short, treasury inflation-protected securities. The principal amount of these bonds is adjusted in proportion to the increase in the consumer price index. They're based on something called the consumer price index that comes out on a monthly basis. So they provide a constant stream of income in real dollars. So it's the same amount, although it's a different amount, but in terms of a real amount, let's assume they promise to pay you 2%. But if inflation goes up, if the inflation is 2 and they promise to pay you 2, but the inflation now is 3, they'll pay you 3%. Although they pay you more, but as far as inflation, your money is the same. So you would earn basically the same. And the real interest rate you earn on these securities are risk-free if you could hold them to maturity. So there's no risk in holding these bonds. They're kind of risk-free because why their treasury bond? Every time there's treasury involved, it's risk-free. That's another type of bond. We do have other types of government or federal agency bond. And here, think about Fannie Mae and Freddie Mac and Jenny Mae. Those are government agencies. They issue their own securities to finance their activities. Think of them their government, but they issue bonds. It's like a private company. They borrow money for themselves. Now, why? Because Congress think that some industries don't get enough money from the private sector. So what they do, they create a federal agency to raise money for that sector. So public policy reasons to channel credit to a particular sector specifically, the housing, that Congress believe is not receiving adequate credit through normal private sources. So the government says, we're going to create our own corporation and issue bonds to kind of help the housing market. And here's some examples of them. The Federal Home Loan Bank, they can issue bonds. Fannie Mae, the Federal National Mortgage Association, the Government National Association, Jenny Mae, and Freddie Mac, which is the Federal Home Loan Mortgage Corporation. So what they do is they issue their own bonds and you can buy their bonds. And they take this money to finance the housing activity in the country. So the debt of the federal agencies was never explicitly ensured. It's assumed that the government will come in and they will cover their debt. That's assumed. Those beliefs were validated when Fannie Mae and Freddie Mac encountered severe financial distress. We talked about this in the prior session, that these two companies, they didn't go out of business, but basically the government took them over because they couldn't pay their bill. Now, bear in mind, with both firms on the brink of insolvency, the government stepped in and put them into what's called conservatorship, which is they took them over, assigned to the Federal Housing Finance Agency to run the firms. So basically they became kind of government. But they did not, but they did in fact agree to make good on their firm's bond. So what they did is, as they said, it's assumed that they will back up their bond and indeed they backed up their bond. Now outside the US, we have what's called international bonds and we kind of covered them a little bit when we talked about money market. So many firms borrow money abroad. So you have a US company or a European company or an agent company. They want to borrow money from, you know, a European company wants to borrow money on Wall Street or a US company wants to borrow money in London. So many firms borrow money and many investors buy bond from foreign issuers. So in addition to your national market, initial to your national capital market, there's a thriving international capital market, largely the central location for it is London. We have what's called the Euro bond is a bond denominated in the currency other than that of the home currency. Now when we say Euro bond, people think it's in euros. It doesn't have to be in euros. Usually it's in US dollar, but it's let's assume a European company wants to raise money in US dollar or an Asian company wants to raise money in US dollar and they want to sell bonds in US dollar. We call it Euro bonds. It doesn't, it's not actually in euros. It just, it's bond denominated in a currency other than that of that country. That's what it is. For example, a dollar denominated bond sold in Britain. So it's a dollar denominated bond, but it's sold in Britain. It's a Euro bond. Euro yen bond, which is kind of similar, yen denominated bond sold outside Japan. So if there's any bond sold in the yen currency, but outside of Japan, it's called Euro yen. So it's just, it's really a misnomer. Since European country is called the Euro, the term Euro bond may be confusing. It's best to think of them as simply international bonds. That's basically what they are. They don't have, they're not in euros. They're not in euros. In contrast, the bonds that are issued in foreign currency, many firms issue bonds in foreign countries, but in the currency of the investor. That's also, that's also the case. For example, a Yankee bond is a dollar denominated bond sold in the US by a non US issuer. So you have, for example, a Japanese company coming here and selling bonds, okay, a dollar denominated bonds, but it's not a US company. It's called Yankee bond. That's another type of bond. We also have Sumera bond, our yen denominated bonds sold in Japan by non Japanese issuer. So if a US company goes to Japan and wants to sell bonds, raise money in the Japanese market, it's called Sumere bond. So if you want to invest in them, that's fine. You will invest in them. Now let's shift gears and talk about municipal bond, municipal bonds or local government bond. Simply put, the local government, for example, the municipality, a county, a state, they want to raise money because they need money to operate the business, to pay the police force, to pay the firefighters, to expand whatever, whatever the need is to conduct social services. Those are the municipal bond. So those are tax exempt bonds. Tax exempt, tax exempt means they are not taxed on the federal government. Now why not? Here's, here's the concept. The concept is the US government, the federal government is responsible for helping municipalities. So what the US government says, look, we can't give you money, but if you borrow your own money, we're going to give you a tax advantage. And what's the tax advantage? The people that give you money to, to conduct your business, we will not tax them. So you, your local, let's assume you live in town in a town called ABC and ABC town issue bonds and you purchase from that town, you know, $10,000 worth of bonds. The bonds are paying, let's assume 10% per year. So you will get $1,000 per year in interest. Here's what happened. This $1,000 is tax free. The US government says because the minus ABC, ABC municipality, you know, is trying to raise money, we're going to encourage investors to give you money. We will not, you will not have to pay, the investors will not have to pay taxes on that money on the federal level. Okay. We have two types of municipal bonds. We have what's called the general obligation bonds that are backed by the full faith and credit of the issuer. So for example, my town, my township, let's assume my township, Westchester wants to raise money, they can issue what's called the general obligation bond. Simply put, you give them the money and your trust are going to give you the money back. Why? Because they have tax and power, municipalities and counties, they have a tax and power. There's another type of bonds that are also considered the municipal bonds, it's revenue bonds. These are different. So let's assume the city of Philadelphia wants to put an airport, okay, which they do have an airport actually. What they do is they issue bond, they borrow money, they borrow like $500 million in terms of bond. Now what happens is you're going to get your money from the proceeds of the airport, okay, are issued to finance a particular project and are backed either by the revenue from that project or by the municipal agencies operating the project. Those bonds are a little riskier because they're based on, you know, an airport, a hospital, very common stern pipe. When a state wants to open a road, what they do is they borrow money and they would say you're going to get revenue from the tolls because everybody that drive on that road, they'll have to pay a certain amount of money once they get on this road or once they exit. Therefore, your revenue is from that money. So the revenue bond, they're based on the revenue from a certain activity. The riskier then general obligation because general obligation bonds, because general obligation bonds, the government, they can tax you. They simply, they don't have a reason. You don't have to use the airport. You don't have to use the hospital. They can just simply increase your taxes. They have the power to do so. We also have what's called an industrial development bond. That's kind of a revenue bond that's issued to finance commercial enterprises, such as the construction of a factor that can be operated by a private firm. Now, you have to keep in mind these bonds gives the firm access to municipal, municipal ability to borrow a tax exempt rate. So sometimes what happens is a municipality wants a company to operate under business. So they give them this kind of this status. They're called industrial development. So they would raise the money as if they are a municipality. But remember the federal government here, they limit the amount of these bonds that might be issued because because if they issue a lot of them, then the federal government would lose money because if these bonds are tax free and all these people are getting the interest, but the government is not getting their share, well, that's kind of a form of abuse because the municipality is using their power that the federal government gave them to help private industries or private companies, investors not to pay taxes. So that's why the government would limit those or they review them on regular basis to make sure they're not being abused. Their status is not being abused. Also like Treasury bond, municipal bond very widely in maturity. A great deal of them, the majority of them, they are they are short term tax anticipation notes. What does that mean? It means the municipality, they need the money for this year to pay for expenses before they collect the taxes. So they get the money, they collect the taxes, they pay you back the money. So it's anticipation of their anticipating the tax. They just want to borrow money on a short term basis. And sometimes they borrow the money for long term investment, like let's say they want to build a stadium. Well, well, you're gonna borrow money on a long term basis to to finance large capital investments and they could have a maturity up to 30 year. But remember the key feature in this municipal bond that their tax exempt status and this is what gives them an advantage. Okay, investors pay neither federal nor state taxes on the interest proceeds. This is a great advantage. However, they give you a lower yield because you don't have to pay taxes. That's the whole purpose of the government trying to help them. Therefore, they will offer a lower yield. So rather than saying we're gonna give we're offer 6%, they will offer 4%. And a lot of people will prefer to buy the 4% municipal bond rather than the 6% corporate bond because you pay no taxes. But now we have to find out are you an advantage if you if you buy these bonds. So let's talk about the taxation aspect of this. So one way of comparing bonds is to determine the interest rate on the bond, taxable bond that would be necessary to look to find out what's the after tax return equal to that municipality. So remember, let's go back to the 6% into the 4%. This is the mini bond or that's seven and four. It doesn't matter. This is the mini bond. And this is a corporate bond at face value to why wouldn't I get by a bond that paid me 7%. Well, the reason you might buy the bond at 4% is because the 4% is tax free. So although you would earn 7%, then you have to pay taxes, your net proceeds is less. So we have to find out. So we have to derive the value after the tax, after the tax. And to solve for this, we have two equations we can do it. So we have to find the rate. This is the rate. This is the rate a taxable bond would need an offer in order to match the after tax yield on the tax to the tax free municipal bond. Let's take a look at an example. That's the way the best way to do it. So the rate is to look at your corporate rate times one minus the tax equal to the return on the mini bond. Or if you have the mini bond, you will take the mini bond and you will divide it by one minus the tax rate to find the corporate. So there's two ways to do it. And let's take a look at some numbers and see hopefully this make sense. So let's assume we have this table here. Let me pull my calculator because it's very important to look at this. Let's make sure it sticks here. So let's assume you are offered 2%. You are offered 2%. 2%. So 2% is the mini bond rate. This is the mini bond rate. And let's assume your tax rate is 30%. So if you are being offered 2% money rate, okay, so municipality is offering to pay 2% and your tax rate is 30%. If somebody comes to you and tell you, look, I have a corporate bond. How much will I have to pay you to give me money? To give me money rather than to go to the 2%. What you do is, okay, my rate is 30%. Simply put, I have my mini bond is 2%. This is 2%. If the mini bond is paying me 2%, you have to pay me 2 divided by one minus the tax rate. One minus 0.3 is 0.7. So you have to pay me 2.86%. In other words, the money is paying to define the corporate or the private bond. The private bond will have to pay 2.86%. Now, if my tax rate is 40%, if my tax rate is higher, then you have to pay me 3.3. How did I find 3.3? Here's why. 2% is the money. I'm going to take 2%. Now I'm going to divide 2% 0.02 divided by 0.6, 1 minus 0.4 is 0.6. So let me write the formula here. It's 0.02 minus 1.4 divided by 0.6, which is, you have to pay me. The corporation will have to pay me 3.33. Now, you're saying, why would I have to pay you 3.33? Because if you pay me 3.33, then I'm going to have to pay 40% in taxes. So I'm only keeping 0.6. So this times 0.6, that's going to give me exactly 2%. So that's why you could either use this formula or use this formula or use this formula, depending on what you are giving. So if I came to you and I said, okay, let's work an example here. If I came to you and I said, suppose your combined tax bracket is 30%. That's your tax bracket. Would you prefer to earn 6% taxable return, which is corporate bond, because it's taxable, or a tax-free yield of 4%. Well, here's the money. I know the money is 6, and I'm sorry, I know the money is 4%. The corporate is 6%. Now, what I have to do, I have to turn, I have to find out how much would I earn on this corporate after taxes. Well, to find out how much do I earn after taxes, it's 6% times 1 minus 0.3. So I'm going to be keeping only 70% of my return. So 6% times 0.7, that's going to give me 4.2. Which one would you prefer? Would you prefer to earn 4% or would you prefer to earn 4.2? And the answer is, in this situation, you will take the corporate bond because the corporate bond is earning 4%. Let's assume the tax rate was 40%. Now let's change this, keep this, let's change this, let's change the numbers. It's 6% times 1 minus 0.4, 6% times 1 minus 0.4. Well, 6% times basically 0.6, and that's going to give me 3.6. Now, if my tax rate is 40%, I'll prefer the municipal bond because my net return on the corporate is 3.6. So simply put, the higher your tax return, the higher your tax return, the more benefit is the municipal bond to you. You have more savings in the municipal bond. Now, the second question is, what's the equivalent taxable yield of the 4% tax-free yield? So simply put, you are earning 4%. How could you compare the 4% to the corporate 6%? You will take the 4% 0.04 divided by 1 minus 0.3. So if I take 0.04 divided by 0.7, this bond is only earning 5.7%. So this mini bond, remember the original, the original problem, we always prefer the corporate because the municipal bond is earning me equivalent taxable yield of 5.6, but the corporation is paying me 6%. Therefore, I will go with the corporation. Now, if my tax rate is 0.4, if my tax rate is 0.4, now if I go with, let me clear this, 0.04 divided by 0.6. Now I'm, sorry, 0.04 divided by 0.6. Now I'm earning 6.66. Now I have a better return than the corporate bond if my tax rate was 40% rather than 30. Again, in illustration, both ways, that if you have a higher tax rate, you can benefit more from your municipal bond. Let's talk about corporate bond. Corporate bond is corporate bond when the corporation borrows money. That's how they do. It means by which private firms borrow money directly from the public. So this is one way for corporation to raise money is bonds. They also pay interest, typically semi-annually, doesn't have to, but usually they do, semi-annual coupon over their life and return the face value to the bond holder. Simply put, you give them a million dollar now, they'll pay 5% for 10 years, and they'll give you back your million dollar, the face value. The risk you're then treasury bond, obviously, because they are private. The risk of the fault is higher. Government don't go out of business, but businesses do go out of business. So there is a real risk of the fault when you buy a corporate bond. Therefore, you have to check the rating, whether there are AAA, AA, AAA, triple b, double b, so on and so forth. And we'll talk about bonds later on. But here we're going to talk about few types of bonds, just as an overall picture, we have secured bonds. They have specific collateral backing them in the event of a firm bankruptcy. For example, you lend the company money, but they will tell you, look, if we don't pay you, we're willing to sell this building to pay you back your money. Therefore you are secured secured is better than unsecured unsecured means they're also called before what it means they're also called the venture it means there's no collateral look you're giving us the money and your trust will pay you back there's no collateral and there's subordinate the venture which have a lower priority claim of the firm asset in the event of in the event of bankruptcy those subordinated the venture it means well look you're going to be the last online to get your money which is very risky we have what's called callable bond at the option of the corporation so the corporation can call the bond what does it mean callable bond that means the company have the option to purchase the bond from the holder at a predefined at a stipulated predefined price so you gave them the money today six months from now they can come back and they give you they have you have to accept their money your money back and they will take away the bond why because they have the right to call it the bond was callable they would let you know up front look at any point in time we can buy it back usually they will pay you a premium they will pay you more than what you pay but there's always the risk if they give you back this money and interest rate goes down you lose because you cannot find an alternative investment simply put let's assume you lend you you lend $100,000 to a company that's paying you 10% but the bond is callable well that's fine 10% is a great return then suddenly interest rate went down to 6% if the bond is callable the company might give you back 105,000 take away your bond now you have back 105,000 but the interest rate is 6% so you cannot find an equivalent alternative investment to invest your money and this is what usually happens when interest rate goes down the company will call the bond and we'll talk about this later on we have what's called convertible bond this this convertible bond is at the bond holder option so now you have the bond in your hand you have the option to convert the bond into stocks so simply put you go from you go from a lender to an owner in the company and we'll talk about all these bonds later on including how to value a bond but this is just just to let you know the bonds bonds come in many different flavors and in many different denomination now let's talk about mortgage and asset backed securities well what are they well securities that are backed by something what is something well it's either a mortgage like a loan or some other asset we'll talk about this so simply put you go to the bank you get your loan they give you the money you give them a piece of paper with the loan now this loan is backed by your home so what the bank will sell this loan they will create an asset out of this loan and this asset is also backed by the loan therefore the asset is the asset is called asset backed securities it's backed it's supported by the loan on the home simply put the home itself so it's either an ownership claim and a pool of mortgage it doesn't have to be one mortgage a pool of mortgage or an obligation that is secured by such a pool so simply put they issue a bond and they're saying if we if you don't get your money we would sell the asset in this pool whether it's home or cars or anything else and give you back your give you back your money so this the bond is backed so there's a collateral but that collateral is some type of an asset okay so there are a major component of the fixed income market they're most passed through traditionally comprised conforming mortgages so most of these asset backed securities especially the mortgages they used to be they used to be comprised of conforming mortgages now what is conforming mortgages it means the people who took the money out they're credit worthy credit worthy mean they have a good credit have a good credit means they're gonna pay their loan if they pay their loans the investor is safe okay the person that bought that asset backed securities should be safe so so most of them Freddie May and and Fannie Mae and Freddie Mac they could not buy them unless they are confirming mortgages then at some point the government told these companies look we want to encourage people to buy homes in an effort to make housing more affordable to low income household the government sponsored enterprises they were encouraged to buy subprime mortgages so the government told Fannie Mae and Freddie Mac look we know you like to only buy safe mortgages but some people they cannot buy a home because they don't qualify but if you buy their mortgage the lender might be willing to buy them well to lend them money and as a result we have the subprime mortgage debacle where people were getting money to buy a home the loan was sold to Fannie Mae and Freddie Mac the bank did not care whether they can pay or not because Fannie Mae and Freddie Mac is carrying the loan what happened these loans turned out to be a disaster with trillion of dollars of losses spread among banks hedge funds whoever touched these loans losses as well as Fannie Mae and Freddie Mac and this is what the subprime mortgage crisis is all about where asset backed securities which would lousy assets basically the assets were not good because the homeowners could not pay their bill and this is a picture of private issuers versus federally federal agencies and pastro so notice the private issuers they're smaller they're smaller and notice they peaked in 2008 then they went down and now they're flattening out I don't know what's happening in 2017 2018 there's there is some talking that they're spiking up again so the point is these private issuers they don't care why because once they sell the bond they don't have to worry about the the credit worthiness of the of the board also it's common these days for car loan student loan and home equity loan which is the second second mortgage as well as credit card loans and even that of private firms to be bundled in a pastro means they take these loans they bundle them in bonds they put them all in bonds and they sell the bonds to investors and basically the investors get their money from the people who owes the money to the bond to the bond holder then the investor gets their money from these people so as long as the people are paying their car loans the investors is happy as long as the students are paying their student loan the investor is happy and notice here the student loan is increasing notice there was a small amount of student loan back in 96 now it's a large amount of student loan old also equipment loans against equipment credit card loans automobile all of those are asset backed securities as they're considered asset backed securities I don't know how much is you know what can you do if this if a student loan default if the students defaulted under loan what's the asset backed securities the asset is is the student cannot default once you remember once you have this student loan even if you file for a bankruptcy you can get out of it so that's what that's what the people what's that's what the investors are banking on so you always have to pay something you always have to pay something but I'm not sure about the credit card loan there's really no most credit card loan they're unsecured so you really cannot call them in my opinion asset backed securities credit card loans anyhow this is we talked about the bond market in the next session we would look at another asset classes which is the equity securities as always I would like to remind you to like this recording share it put it in playlist put it in playlist and don't forget to visit my website farhatlectures.com for additional resources whether you are an accounting finance student studying for the CPA or the CFA exam good luck study hard and stay safe especially if you are still in through the still living through this coronavirus