Booyah Breakdown: Bond With Bonds

Editor's Note: This is the first of a three-part Booyah Breakdown series on bonds

First, I'd like to wish all you hard-working, stressed-out, over-exhausted mothers a fabulous, well-deserved Mother's Day. I don't care what anyone says, it is by far the hardest job out there. Taking a company public is a cakewalk compared to making lunch and breakfast at the same time while trying to give an infant a bottle and help your oldest study for a test, all before 7:30 in the morning.

So while you're reinforcing the bonds that tie you with your mother this weekend, you might also want to reinforce your knowledge of bonds. It seems you can't read an economic report these days without having to get through a spattering of bond market data.

Treasuries were inching higher. The 10-year note was up 2/32 in price, yielding 4.63%, and the 30-year bond was adding 2/32, yielding 4.82%.

Huh?

The bond market, though generally a big enigma to most investors, is correlated to the equities market. As Frank Sinatra croons in his song Love and Marriage, "You can't have one without the other."

So the Booyah Breakdown is going to start to tackle the bond market today. Today we'll go over some bond basics, and next time we'll explain how bonds price and why the infamous yield curve is making some folks nervous these days.

All in the Family

There are a bunch of similar concepts among all bonds, so let's illustrate with a very commonplace example.

Your brother needs a $5,000 loan.

You have no desire to lend him money because you know you'll never see it again.

But this time he gets smart and offers you an 8% semiannual interest payment on your loan. And he swears on his custom-made motorcycle (no, I am not speaking from experience) that he'll repay your $5,000 in three years.

For some unknown reason, you decide to give him the benefit of the doubt and lend him the $5,000. In addition, you set up an automatic debit from his checking account to yours (because you got smart, too) for your $200 semiannual interest payment (annual interest would be $400 -- 8% on $5,000 -- but you need to divide it over two payments).