Here’s an introduction to bonds.
A bond is a loan or a debt between bond issuer (borrower) and bond holder/owner (lender). Like a loan or debt, a bond must be paid back with interest or at some rate of return. A bond holder, obviously, has no ownership interest in bond issuer - unlike a stock holder/owner.
There many types of bonds. Here are the more typical ones:
A bond is at face value (or par value) - usually $1,000 or $5,000. The bond issuer promises to pay bond holder the face value or principal at some specified future date known as the maturity date. To compensate the bond holder for paying principal at maturity date, issuer agrees to pay interest to bond holder at some coupon rate.
For example, let’s say you buy four - 10 year bonds at face value of $1,000 and pay 6% coupon rate. As a bond holder, you would receive $240 per year for 10 years and then receive $4,000 on the maturity date. Now, this example assumes a fixed coupon rate but many bonds have a floating rate - a coupon rate tied to some index rate such as London Interbank Offer Rate (LIBOR).
Now, the above example as assumes you buy bond in primary market or initial offering. But most bond investors buy bonds in the secondary market or bond market. This is where bond prices become relevant because bond prices do fluctuate over time. Bond pricing can be tricky for someone new to bonds. Let’s start with pricing convention - bond are priced as a percentage of par value. For example, you might see a quote in Bloomberg for 101-19 (dash or colon represents 32nds of a dollar for 10 year Treasury Note, this means the bond price is 101-19/32% of $1,000 or $1,015.94. In this example the bond price was above par value (101-19) this is known as a premium. Bonds trading below par value (say 99-27) are trading at a discount.
There are a number of factors that effect the price of bonds including issuer’s credit rating, inflation expectations, supply/demand of debt issues, and economic outlook. These factors and a few others such as reinvestment risk are reflected in market yield or bond yield. Generally, bond investors demand higher market yield or bond yield to compensate for higher risk. And this is where it sometimes gets tricky but it’s very important to understand: Bond price and market/bond yield have an inverse relationship - when market/bond yield goes up, bond price decreases; and when market/bond yield goes down, bond price increases.
So much for an introduction. Any questions?
Like all investments, before investing make sure we understand what we are getting ourselves into. For information on investing in bonds - check out - InvestinginBonds.com. Good luck.
economy financial+crisis budget+deficit obama unemployment jobs credit+cards debt social+security personal+finance capitalism deficit bailout mortgage mortgage+crisis economic+crisis wall+street+bailout new+economy job+guarantee retirement+savings credit+unions deficit+hawks economic+stimulus cooperatives income+inequality health+care+reform financial+regulatory+reform worker+cooperatives gdp federal+debt financial+conglomerates tarp financial+oligarchy 401k scams fiat+currency debt+management new+normal money consumer+debt investments china economic+growth wages federal+reserve globalization savings consumer+protection stimulus neoliberal unemployment+rate tax+cuts middle+class wall+street investing foreclosure budget financial+planning credit+card+debt debt+settlement federal+deficit democrats republicans stocks government+spending negative+equity risk modern+monetary+theory stock+market neo-liberal checking economic+policy u.s.+treasuries bonds economic+mobility job+growth bank+of+america foreclosure+fraud taxes consumer+spending cfpa ira inflation class+war jobs+report financial+bailout fiscal+policy evil pete+peterson health+care financial+literacy jobs+crisis foreclosures move+your+money full+employment auto+industry president+obama gold+standard debt+ceiling center+for+responsible+lending mutual+funds innocent+fraud aig life+insurance personal+income trade+deficit market+fundamentalism consumer+financial+protection+agency cash+flow banking identity+theft fraud compound+interest too+big+to+fail predatory fdic state+of+the+union u.s.+treasury+securities net+worth class+warfare bankruptcy derivatives goldman+sachs mortgages debt+consolidation eu great+recession gold keynes refinance fico+scores debt+crisis credit+scores real+estate mortgage+foreclosure financial+regulation banking+system federal+budget de-regulation financial+crisis+inquiry+commission deficit+commission debt+servitude krugman free+trade solidarity wisconsin income+tax refinancing debt+collection loan+modifications financial+stability+plan poverty trickle+down+economics working+class retirement currency wills economics #finreg tbtf monthly+budget estate+planning consumer+credit disability+income+insurance scam fiscal+sustainability home+mortgage fixed+rate+annuity lobbyists debt+is+evil balance+check+book credit+report teach-in currency+manipulation bill+gross insurance variable+rate+annuity corporate+tax+breaks credit+card+law deficit+spending tina general+motors economic+indicators budgeting financialization warren+mosler washington+consensus foreclosure+rescue+services gross+domestic+product race+to+bottom big+banks marx june+jobs+report open+auction lost+decade financial+genocide republican+budget emergency new+capitalist+manifesto bank+fees credit+card minsky tips geithner commercial+real+estate direct+jobs+program civil+disobedience human+capital direct+deposit reaganomics overdraft cfpb galbraith social+security+cards personal+consumption treasuries protests balance etf economic+justice barack+obama worker+ownership wall+street+bailouts exports household+debt fallacy+of+composition gas+prices obama+administration destruction citizens+united outlays unemployment+benefits imports card+act fallacies securities+laws save public+option living+standard unions july+2011 laid+off citigroup financial+sector foreclosure+gate auto+loans emergency+funds deductibles strategic+defaults keynesian wiped+out productivity+ralph+nader new+era+windows money+market+accounts unemployment+insurance fox+news+channel human+capitalism savings+tip financial+reform arra free+credit+report chicago money+market+mutual+funds afl-cio fox move+money predatory+lending credit+rating+agencies credit+reports fallacy uaw employment principal+reduction roger+ailes close+banking+accounts countervailing+powers refund+anticipation+loans jobs+data moody's revolution tax+reform denmark propaganda banking+services john+k.+galbraith tax+refund debt+forgiveness lehman+brothers cornel+west exuberance disposable+income national+infrastructure+bank corporate+welfare u.s money+manager+capitalism birth+certificate monetary+policy option+arm mortgage+loan+modifications subprime+mortgages corporate+profits interest+rates greece quantitative+easing political+system fundamentals living+wage output+gap success consumption ltcm universal+health+care income+distribution household john+mccain minimum+wage new+democrat+coalition two+americas frontline senate+democrats eurozone debt+commission haymarket american+recovery+and+reinvestment+act oligarchy two+economies income regulations ben+bernanke california+budget catfood employee+ownership existing+home+sales jobless+recovery carried+interest john+edwards mark+to+market budgets payroll+tax euro chicago+idea paladino robert+reich gmac life+settlements tax+holiday ireland mlk fannie+mae housing+market cowards slavery dollar sector+balances target+date+mutual+funds argentina fierce subprime bad+bank bullshit phone+scams financial+regulations national+debt free+markets united+states now savings+plan alan+greenspan deficit+errorists payroll+tax+holiday time+value+of+money cost+of+unemployment ponzi+schemes swipe+fees savings+bonds shadow+banking+system fica+tax madison great+divergence paulson future+value pensions fed+audit debit+cards credit+markets fair+debt+collection+practices+act tax+code #wallstreetscam cash cdo walker warren+buffett treasury+department present+value tax+deal cooperative+economy predatory+home+lenders liquidity u.s.+debt poverty+rates conservatives ppip job+loss 20-year+mortgage obama+tax+deal short+sales cash+management treasury+securities detroit+schools home+buying economic+purgatory long+term+unemployment vicious+cycle bartering emergency+savings efca debt+hysteria home+closing banks deficit+hawk american+capitalism community+gardens economic community+banks debt+to+gdp recession austerity online+scams income+taxes investment inequality estate investment+yields happy+year finreg hyman+minsky american+dream email beige+book mortgage+modifications yuan risk-return investment+advice dot+com+bubble leading+economic+indicators malicious+software deflation corporate+bailouts federal business+roundtable cooperation returns housing+bubble chris+dodd lei deferred+annuities bailouts economic+policies balancing+checkbook alternatives