• How do interest rates effect bond prices? • What is the likely future direction of interest rates and the resulting impact on bond prices? • How do you know if your bonds are safe? • Is owning bonds through bond mutual funds less safe? • How to use investment policy to manage bond safety? • Performance reporting and policy compliance – particularly related to bonds

1. Thrive. Grow. Achieve.
Are Bonds Safe? - What your
Board Needs to Know about
Interest Rate Expectations
and Bond Prices
Mark Murphy, CFA
Dennis Gogarty, CFP®, AIF®
Copyright Raffa Wealth Management, LLC All Rights Reserved

2. Are Bonds Safe? Page
DISCLAIMER
2
Different types of investments involve varying degrees of risk,
and there can be no assurance that the future performance of
any specific investment, investment strategy, or product
referenced directly or indirectly in this report, will be
profitable, equal any corresponding indicated historical
performance level(s), or be suitable for your nonprofit’s
portfolio. Moreover, you should not assume that any
discussion or information contained in this report serves as the
receipt of, or as a substitute for, personalized investment advice
from Raffa Wealth Management, LLC or from any other
investment professional. To the extent that you have any
questions regarding the applicability of any specific issue
discussed above to your nonprofit’s unique situation, you are
encouraged to consult with Raffa Wealth Management, LLC or
the professional advisor of your choosing.

3. Are Bonds Safe? Page
A SNAPSHOT OF RAFFA WEALTH
MANAGEMENT
3
Portfolio
Mngt for
Nonprofits
401(k) &
403(b)
Consulting
Nonprofit
Policy
Consulting
$570 AUM
& 66
Nonprofit
Clients*
Acts as
Fiduciary
Study on
Nonprofit
Investing
(SONI)
*AUM and NP Clients as of 12/31/2015
@ RaffaWealthMngt

4. Are Bonds Safe? Page
THE STUDY ON NONPROFIT
INVESTING (SONI)
4
•Peer benchmarking survey
•Last year, over 700
nonprofits participated
•Helps to answer
– How do other nonprofits invest their reserves?
– Are our investment policies “normal”?
– Is our investment performance in-line with
similar organizations?
•FREE results report
•Visit www.npinvesting.org
to see last year’s Executive
Summary
Participate today! Deadline is Tuesday, Feb. 28
https://www.surveymonkey.com/r/2017SONISurvey_116
@SONIstudy

5. Are Bonds Safe? Page
AGENDA
5
• How do interest rates effect bond prices?
• Are bonds safe?
• How do you know if your bonds are safe?
• What is the likely future direction of US interest rates and the
resulting impact on bond prices?
• Is owning bonds through bond mutual funds less safe?
• How to use your investment policy to manage bond safety.
• Performance reporting and policy compliance – particularly
related to bonds

6. Are Bonds Safe? Page
HOW DOES BOND VALUATION WORK
6
The price of a bond is the present value of all
cash flows generated by the bond (coupon
and face value) discounted at the required
rate of return.

7. Are Bonds Safe? Page
HOW DO INTEREST RATES EFFECT
BOND PRICES?
7
Example of how a bond is priced:
-First issued – in line with market rates
-10 year bond, fixed rate 5% coupon
-If interest rates move to 6%
-If interest rates move to 4%
When interest rates rise bonds prices fall
and when interest rates fall bond prices rise.

8. Are Bonds Safe? Page
HOW DOES BOND VALUATION WORK
8
Factors that drive change in bond prices:
-Inflation expectations
-Credit quality
-Maturity/duration
-Financial news
-Monetary/fiscal policy

9. Are Bonds Safe? Page
ARE BONDS SAFE?
9
-It depends what you are comparing
them to.
-On average negative returns from bonds
every 6 years vs. stocks every 4 years.
For Illustration
purposes only.
Indices are not
available for direct
investment and
performance does
not reflect expenses
of an actual portfolio.
Past performance is
not a guarantee of
future results.

10. Are Bonds Safe? Page
HOW DO YOU KNOW IF YOUR BONDS
ARE SAFE?
10
-Credit rating
For Illustration
purposes only.
Indices are not
available for direct
investment and
performance does
not reflect expenses
of an actual
portfolio. Past
performance is not a
guarantee of future
results.

11. Are Bonds Safe? Page
HOW DO YOU KNOW IF YOUR BONDS
ARE SAFE?
11
-Duration - measure of the approximate sensitivity
of the price of a bond to a change in interest rates.
Starting Yield = 2.3% Duration = 5.6 years
Source: Vanguard
For Illustration purposes only. Indices are not available for direct
investment and performance does not reflect expenses of an actual
portfolio. Past performance is not a guarantee of future results.

12. Are Bonds Safe? Page
HOW DO YOU KNOW IF YOUR BONDS
ARE SAFE?
12
-Diversification (no sector or geographic concentration)

13. Are Bonds Safe? Page
WHAT IS THE LIKELY FUTURE
DIRECTION OF US INTEREST RATES
13
Source: Federal Reserve
Board of Governors
-Fed says expects to raise Fed Funds rate three
times this year
-Said this last year - raised once
-A large shock to the markets or weaker
economic data could drive rates down again

14. Are Bonds Safe? Page
IMPACT ON BOND PRICES
14
-Likely that US interest rates will rise
over longer term.
-Speed of interest rate increase
-Still serve important roll in
portfolio
-Unlikely to time interest rates
-Maintain shorter maturity
-Investors with time horizon
longer than duration of their
bonds in better shape

15. Are Bonds Safe? Page
IS OWNING BONDS THROUGH BOND
MUTUAL FUNDS LESS SAFE?
15
Owning bonds through bond funds can be just as
safe as owning individual bonds – just a different
structure
Pros:
-Diversification
-Ease of investment/timeliness
-Greater efficiency
-Dividend reinvestment
-Can maintain targeted characteristics more easily
-Liquid
Cons:
-Not as customizable
-Exact interest payments and future value
unknown
-Heavy outflows by investors

16. Are Bonds Safe? Page
HOW TO USE INVESTMENT POLICY
TO MANAGE BOND SAFETY
16
-Credit quality
-Average maturity/duration
-Diversification
-Reporting requirements

17. Are Bonds Safe? Page
PERFORMANCE REPORTING AND
POLICY COMPLIANCE –
PARTICULARLY RELATED TO BONDS
17
-Ask that your advisor include a statement or statistics comparing
what is in the IPS to how the bond investments sit currently.

18. Are Bonds Safe? Page
CONCLUSION
18
• When interest rates rise bond prices fall and when interest rates fall bond prices rise.
• Over the long term interest rates are likely to increase, however the pace of increase
determines the degree of impact.
• Bonds are generally much safer than equities.
• Review your portfolio’s credit quality, maturity/duration and diversification to
determine how safe you portfolio is.
• Owning bonds through bond mutual funds is just as safe as owning individual bonds
assuming the mutual fund meets several standards.
• Include credit quality, average maturity/duration, diversification and reporting
requirements in your investment policy to manage bond safety. Require your
investment advisor to compare the bond portfolio vs. the policy requirement in
reports to confirm compliance.

19. Are Bonds Safe? Page
WHAT’S YOUR ACTION?
19
• We have provided a document outlining six
questions a non profit should verify in their
Investment Policy Statement (IPS) – review
this and confirm IPS addresses these issues.
• If there is uncertainty about your
organization's fixed income investments –
we can help.
• Please participate in the 2017 SONI survey.