- Bonds offer little instant gratification to investors.
- Bonds are seen as "boring." In other words, there is no "story" to tell. It is more sexy to discuss your purchase of Baidu (BIDU) than the "5.25% General Electric (GE) of 2010" (a GE bond paying a 5.25% annual
interest ratethat will maturein 2010) in your portfolio.
- Bonds are traded in
dealermarkets and as such receive little or no media attention.
- Bond pricing (see
valuation) is far less transparent that stock pricing.
Corporate: Simply put, these are bonds issued by a corporation (see "Corporate Bonds").
Municipal(or "Muni"): This category of bonds is issued by a state, city, county or other municipality (see "Municipal Bonds").
U.S. Government(or Treasury): Bonds issued by the U.S. Treasury on the full faith and credit of the United States of America (see "Treasury Bonds").
- Sovereign:These are bonds issued by foreign nations.
- Agency: Bonds issued by agencies of the U.S. Government or pseudo-governmental entities. An example of such bonds are those issued by
Asset-backed securities(or asset-backed bonds): These are the "bad boys" of the credit markets at the heart of the current mortgage and credit crisis. Asset-backed securities take many forms, such as pools of mortgages or auto loans (see "Mortgage-Backed Securities 101").
1. Some bonds, such as corporate bonds, are taxable. Other bonds, such as municipals, may be "triple3. Credit Ratings and Spreads Not all borrowers are alike. Let's look at two extremes. On one end, you have a borrower who is so credit worthy that they will almost certainly repay their debt. Let's call this debtor the "Omnipotent Borrower." On the other end, you have a borrower whose ability to repay their obligations is far less certain. Let's call this one the "Deadbeat."
tax exempt," free from federal, state and local taxes. U.S. Government bonds are taxable by the IRS (U.S. Internal Revenue Service) but not by state or local governments. 2.Not all bonds are alike. There can be differences between bond classes and within bond classes (see subclass). This is due to the credit worthiness (see credit rating) of the issuer. I will tackle that in the next section.
CouponBonds: These are bonds that have periodic interest payments. There are two types of coupon rates: fixed and floating. With a fixed coupon rate (similar to a fixed-rate mortgage), the interest rate remains the same throughout the life of the bond. On the other hand, with a floating ratecoupon bond, the interest rate will vary according to some predetermined formula on a periodic basis.
Zero-Coupon Bonds: Sometimes referred to as "zeros" or discount bonds, these bonds will not pay periodic interest payments to bond holders. Instead, the borrower will receive an amount less than its maturity value on issuance of the bond in return for payment of the full face valueat maturity.
Convertible Bonds: These are bonds that can be exchanged for shares of stock in the issuer's company. Some convertible securities are mandatory convertibles, while others are convertible at the option of the holder (see "Convertible Bonds").
Equity- IndexedLinked Bonds: These are notesthat have a debt component and a contingent payment based on the performance of a particular stock or stock index.
- 1. Identify several bonds that you would be interested in buying. Then determine what the credit
spreadis and compare those spreads against the issuers' credit ratings.
- 2. For one bond issuer, identify different forms of bonds (such as fixed, floating and convertible) and compare the
yieldsfor each form.
- 3. For the same
maturity date, compare the yields for different type of issuers (such as U.S. Government, corporate, agency and municipal).
Getting Started With Bonds
Bond Mutual Funds
Building a Do-It-Yourself Bond Portfolio
Booyah Breakdown: Bonding With Bonds, Part 1, Part 2and Part 3