Vanilla Bonds

Vanilla Bonds are a very standard type of bond. Unlike the Zero Coupon bond that pay on the maturity date, vanilla bonds pay annually at a fixed rate of interest, then that payment drops off the bond. This continues through the length of the bond which is five years when it is redeemable with the last payment including the face value. However, it is important to understand that with vanilla bonds that although the interest rates do not change, the yields do which means the bonds price changes. TransCanada Corporation and Kinder Morgan Inc. are two very large natural gas transmission companies that I will be providing bond information on. TransCanada Corporation is based out of Canada and Kinder Morgan Inc. is based out of Texas.

TransCanada Corporation's "natural gas pipelines accounted for approximately 49% of its revenues, oil pipelines had 9% of its revenues and energy accounted for approximately 42% of the Company's revenues" (Thomson Reuters , 2012). We are all very familiar with this company considering all of the publicity that they are currently receiving regarding the re-routing of the Keystone pipeline due to environmental concerns. "Kinder Morgan Inc. is one of the largest pipeline transportation and energy storage companies in North America with more than 38,000 miles of pipelines and approximately 180 terminals" (Kinder Morgan, 2012). Since both of these companies are very large, there are many divisions or partnerships within their corporations that contribute to their bond. I am going to supply the bond information for a division of each of these companies listed in the chart below.

Bond Information TransCanada Kinder Morgan

Coupon Rate 6.2 6.95

Length of Maturity Year 2037 (30yr total) Year 2038 (30yr total)

Yield to Maturity 4.41 5.61

Today's Price 127.26 118.14

Understanding how to calculate the price of a bond is important, however, the option is available to get this information from the internet as well. To calculate the price of a bond, you must know the coupon rate, the length of maturity, the yield to maturity, and the face value of the bond which with corporate bonds is usually $1000. Since calculating this information can be very complicated, financial calculators and excel spreadsheets equipped with these formulas are available to calculate them for you. For example, I have provided below the calculation of each of the companies prices using an online calculation tool from Fidelity Investments (unknown, 2012).

As you can see from the calculation tool above, the tool gave us the current price of the bond by inputting the coupon rate, the length of maturity, the yield to maturity, and the face value of the bond. In addition to the current price of the bond, the tool gave us the invoice price as well as the accrued interest to date. According to these calculations, it would seem that TransCanada offers the better bond with the amount of payout being higher. The reason for this is because since the time frame of the bonds are the same, TransCanada is receiving a higher amount which means the time value of money is better utilized in this bond. The time value of money frame of mind says that TransCanada is receiving $105 more than Kinder Morgan and that the possibility of outcome from TransCanada may be better in the end than with Kinder Morgan.

Credit ratings also play a factor into the outcome of the bonds. TransCanada currently holds a BBB+ credit rating while Kinder Morgan recently went from a BBB to BB. Credit ratings tell investors how a company pays their bills, if they pay their bills, and if they pay them on time. More investors are likely to buy bonds from corporations that have a more solid possibility of getting their money back at the time of maturity. Banks are an example of an investor whom would invest in TransCanada over Kinder Morgan because they feel more secure in their investment since the credit ratings state how these companies maintain their financials. At the same time, the less secure a bank feels of receiving their money back, the more interest they charge from one company to another. There is more risk involved in lending to a company with a credit rating of BB then there is with BBB+. Within this comparison of TransCanada and Kinder Morgan, it seems that TransCanada bond is the more attractive bond with the higher payout and a better foundation for future gain.

Understanding the different types of bonds will help in any investment situation. The more information you know in regards to investing, the better. Knowing how to calculate the data is also important to know what types of companies are out there and which ones are the better investments. The banks work these numbers and information to secure themselves, so should everyone else. Having a solid strategy will help aim for a more profitable future. Taking into account the credit ratings and the time value of money factor will also help in your investment decisions for wise investing.

Like bonds, stocks are also investments. Stocks are shares of ownership within a company without having an actual say in the operations of the company. When an investor purchases stocks, the investor is paid in dividends. Investors can calculate how much they will be paid in dividends by calculating the future growth and future stock prices. They can measure the future growth by using the constant growth model and then multiply this anticipated growth by today's stock price to get the anticipated future stock prices. I have included a chart below showing the future growth and future stock prices of TransCanada Corp. and Kinder Morgan Inc.

(Petersen, 2012).

As you can see