Blog

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Whether you are in retirement or investing to build a better future, consistent performance and low fees are critical to achieve your goals. It’s also important to remember that duration is only one of many factors that could affect the price of your bonds. And that’s why we think it’s important to work with a financial professional who can help you construct a portfolio that’s built to meet your individual goals. For example, if a bond has a duration of five years and interest rates increase by 1%, the bond’s price will decline by approximately 5%.

You’ve probably seen financial commentators talk about the Treasury Yield Curve when discussing bonds and interest rates. It’s a handy tool because it provides, in one simple graph, the key Treasury bond data what is a bond sinking fund points for a given trading day, with interest rates running up the vertical axis and maturity running along the horizontal axis. Zero-Coupon Bond

A zero-coupon bond is a bond that doesn’t pay a coupon.

How Do I Buy Bonds?

Municipal Bond

A municipal bond is a bond issued by a state, city, county or town to fund public capital projects like roads and schools, as well as operating budgets. These bonds are typically exempt from federal taxation and, for investors who reside in the state where the bond is issued, from state and local taxes, too. If you’re primarily concerned with income, you might prefer for interest rates to rise, which would result in higher yields from bond funds. If you’re primarily concerned with protecting your portfolio against downturns, you might prefer for interest rates to fall and push up bond prices.

Bonds and bond portfolios will rise or fall in value as interest rates change. Instead, duration describes how much a bond’s price will rise or fall with a change in interest rates. Bonds that are not considered investment grade but are not in default are called “high yield” or “junk” bonds. These bonds have a higher risk of default in the future and investors demand a higher coupon payment to compensate them for that risk. Term bonds may come with a sinking fund requirement, where the company sets aside an annual fund to repay the bond. Some companies also offer “secured term bonds” in which they promise to back their bond with company collateral or assets, in case they fail to repay the stated amount of the bond upon maturity.

Term Bond

Yield to Maturity (YTM)

YTM is the overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity. Mathematically, it’s the discount rate at which the sum of all future cash flows (from coupons and principal repayment) equals the price of the bond. Yield to Call (YTC)

YTC is the rate of return received by an investor who holds the bond to its call date and redeems the security at its call price. YTC assumes interest payments are reinvested at the yield-to-call date.

There are other yield measures that exist such as the yield to first call, yield to worst, yield to first par call, yield to put, cash flow yield and yield to maturity. While there are some specialized bond brokers, today most online and discount brokers offer access to bond markets, and you can buy them more or less like you would with stocks. Treasury bonds and TIPS are typically sold directly via the federal government, and can be purchased via its TreasuryDirect website.

Yield

The reason is that bonds are sensitive to changes in interest rates and that sensitivity depends on the bond’s maturity. It’s key to understand the risk-and-return relationship if you’re thinking of investing in bonds. Look at a few examples to get a better handle on how rates, yields, and risk work together over bond-maturity periods. One of the tenets of investing is that with greater risk comes greater return, but that is much truer with stocks than it is with bonds. Stocks come with interest rate risk—the ups and downs of an asset or fund in response to changes in rates. Bondholders are also required to pay taxes on any capital gains on the bond they hold.

After bonds are initially issued, their worth will fluctuate like a stock’s would. If you’re holding the bond to maturity, the fluctuations won’t matter—your interest payments and face value won’t change. Registered term bonds are assigned or registered to specific person or company.

Portfolio Characteristics

Bonds are a type of security sold by governments and corporations, as a way of raising money from investors. From the seller’s perspective, selling bonds is therefore a way of borrowing money. From the buyer’s perspective, buying bonds is a form of investment because it entitles the purchaser to guaranteed repayment of principal as well as a stream of interest payments. Some types of bonds also offer other benefits, such as the ability to convert the bond into shares in the issuing company’s stock. However, if interest rates begin to decline and similar bonds are now issued with a 4% coupon, the original bond has become more valuable. Investors who want a higher coupon rate will have to pay extra for the bond in order to entice the original owner to sell.

Treasury

Treasurys are negotiable debt obligations that include notes, bonds and bills issued by the U.S. government at various schedules and maturities. Treasurys are backed by the “full faith and credit” of the U.S. government. Prepayment Risk

Prepayment risk is the possibility that the issuer will call a bond and repay the principal investment to the bondholder prior to the bond’s maturity date.

Growth of a hypothetical $10,000 investment

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Bloomberg Barclays US Aggregate (ex Lehman Aggregate), Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity or sector for managing specialized portfolios. Convertible bonds, on the other hand, give the bondholder the right to exchange their bond for shares of the issuing company, if certain targets are reached. Many other types of bonds exist, offering features related to tax planning, inflation hedging, and others. Bonds are commonly referred to as fixed-income securities and are one of the main asset classes that individual investors are usually familiar with, along with stocks (equities) and cash equivalents.