The possibility of a company or municipal government defaulting on their bond obligations, usually by going bankrupt, is a real one. For this reason, all bonds are rated according to the financial stability of the issuer. A look at the history of corporate and municipal debt will illuminate the fact that the possibility of the issuer being unable to pay its obligations to bondholders is a very real one. There is an established system of bond ratings that gives a rough estimate of the bond's reliability. Continue reading...
Assessed value is used to determine the property taxes due on real estate. Assessed value is normally lower than the appraised value of a residential property, because it is not looking as much at the value of the home, but rather the value of the property, for property tax assessment. While the assessed value does have to do with the market value of real estate, most calculations only use average home prices the area, found in local real estate listings, as part of the valuation. The “ask” prices are going to be higher than the prices at which they’ll sell. Continue reading...
A bond is a contract which “binds” the lender to the debtor, where an individual investor is generally the lender and the debtor is the company or government which has borrowed funds. When a company or government entity needs more capital, whether to fund operations or a specific project, it can borrow money from investors instead of from a banking institution. Where there is a risk of the investor not being repaid, the interest rate will be proportionally higher. The simplest way a bond works is with set payments at set intervals that gradually repay the debt and interest owed to the investor over a set amount of time. Continue reading...
A callable bond, also known as a “redeemable bond,” is one where the issuer has the ability to pay off the debt prior to its maturity date, with certain conditions. Which the issuer has the right to redeem prior to its maturity date, under certain conditions. The primary reason that an issuer would choose to “call” a bond is that interest rates have declined since the bond was issued. By calling the bond, the issuer generally has to opportunity to refinance that debt at a lower rate. Once called, the issuer will notify the creditor and pay off the debt, typically with a slight premium added to close the deal. Continue reading...
A bond coupon is the interest rate that a bond issuer agrees to pay to the bondholder, representing the interest earned from owning the bond. Bond coupons are fixed at the time the bond is issued and remain constant throughout the bond's life. The fixed nature of bond coupons makes them an attractive investment for investors seeking predictable income streams. Continue reading...
A convertible bond, also known as convertible debt, is debt that can be converted to equity (in the form of common stock) at the discretion of the bondholder. There are typically windows that an investor can choose to convert the bond to equity, which an investor may choose to do if they have confidence the company will continue to perform well. Because a convertible bond has the option to convert to stock, it typically offers a lower interest rate since the conversion capability itself has value. Continue reading...
You might not know it, but the Bond Market is about twice the size of the Stock Market. It’s true; in the US and internationally, the bond market, which includes municipal bonds, corporate bonds, government bonds, v, etc, has almost twice the amount invested in it than the Stock Market. Within these categories, there are many subsets. Bonds are widely used by individual investors as well as corporations and governments. Continue reading...
Bonds are divided into a several categories, and it is possible to get substantial diversification within a bond portfolio alone. Bonds may be categorized into several types. There are investment grade bonds which are conservative and safe, high-yield bonds which are relatively risky and profitable, floating rate bonds whose coupon rate is not fixed, zero coupon bonds which only pay at maturity, and foreign bonds, and so on. Continue reading...
Income bonds are issued by companies and they will only pay a coupon or interest rate if the company generates adequate earnings to do so. Non-payment of a coupon or interest rate does not necessarily mean that the company is in default. The principal amount plus some interest is due to the bondholder at maturity. Income bonds are sometimes issued by companies who are experiencing hard times and cannot guarantee a coupon payment to bondholders. Continue reading...
A yield curve is an illustration of the current duration-to-yield relationship for bonds of the same credit rating but different durations. As a general rule, the longer the duration of the loan, the more risk you take on (since you don't know what might happen with that corporation in the future), and therefore, you demand a higher reward (i.e., higher coupon). The yield curve for any bond (not just the US Treasury Bonds) changes daily based on many economic and market factors. Continue reading...
Par value is the nominal value of a security (such as a stock or a bond) that is typically indicated on the certificate of ownership. Par value is most often associated with bonds, and refers to the amount that will be returned to the investor at the bond’s maturity. Par value of bonds is generally $100 or $1,000. Bonds traded on the open market are not generally bought and sold at par value, as they typically trade at a premium or a discount to par. Bond prices are influenced by interest rates, and have an inverse relationship with them. Continue reading...
A bond trustee is an institution which has the fiduciary responsibility of administering and enforcing the terms of the bond indenture. A bond indenture is the contract between the bond issuer and the bondholder. A trustee has the resources to manage the distribution of the funds to the bondholders, to keep up with and distribute the required bookkeeping and statement information to the interested parties as well as regulators like the SEC. If there is a violation of the contract, the trustee must report it and act in the best interest of the wronged party. Continue reading...
A bond ladder is a portfolio of bonds that have different maturities, that may range from months to years in difference. A bond ladder is designed to reduce interest rate risk and create predictable income streams. An investor will build a bond ladder often in an effort to reduce interest rate risk and also to create predictable income streams, where coupon payments happen at different times and principal is also returned in various intervals. Continue reading...
There will always be more to learn in the investment world: innovation is always happening and the products will change along with market conditions. Bonds are no exception. The bond market is huge — actually larger than the stock market, if you can believe that — and there are literally hundreds of economic, market, and tax-related factors which influence the decisions of which bonds to buy. You must look at the yield curve, duration, rating of the issuer, your own cash flow needs, expected changes in the interest rate environment, changes in the overall health of the economy, tax implications, account in which you're buying bonds, and so forth. Therefore, structuring fixed income accounts is a task which is perhaps better left to professional advisors. Continue reading...
A corporate bond is a debt security issued by a public or private company to raise capital. They are generally issued in multiples of $1,000 or $5,000, and the issuing company must agree to pay a certain interest rate typically determined by their creditworthiness and earning history/potential. Often times the corporation issuing the debt must use their physical assets as collateral, and it is often found that corporations are more likely to issue debt during an environment when interest rates are low, so they can borrow at attractive rates. Corporate debt that matures in less than one year is called ‘commercial paper.’ Continue reading...
Maturity is the amount of time an investment exists - once the security matures, it is paid off to the investor and concludes the transaction. Maturities are most commonly used in the fixed income context, with bonds having maturities consistent with when their principal is paid back to the investor. What is Yield to Maturity? How Do I Structure My Bond Portfolio? Continue reading...
Bond yield is a measure of the return on investment for bonds, and there several kinds of yield that can be computed. Yield on a bond is the amount of interest that it pays annually, as a percentage of the amount invested — at least, this is the most common type of yield discussed, which is known as Current Yield. If a bond pays quarterly or monthly income to the investor, these payments are totaled up and divided by the amount invested. Continue reading...
This term might apply to bonds or pensions and other financial instruments which build up interest value which is paid out at a later time. Accrual Rate is the rate at which a nominal interest rate is credited to an account that will be paid out at a later time. A bond sold in the secondary market, for instance, will take the accrual rate into account if the sale takes place in between coupon payments. Continue reading...
An interest rate is a simple financial principle that’s been around for centuries, whereby a borrower has to pay for money borrowed. The interest rate is agreed to between the lender and the borrower, and there may be provisions under which the rate could change over the course of a loan. In simple terms, an interest rate is the cost of money. Continue reading...
There are three major ways to structure a bond portfolio: a ladder strategy, a barbell strategy, and a bullet strategy. A ladder strategy is structured by purchasing bonds of varying maturity dates, all at the same time. This means there will be several opportunities to make decisions at different dates in the future, so the owner of this portfolio keeps his or her options open to some extent, and has some liquidity over the course of the duration. A ladder might be used when rates are expected to stay about the same. Continue reading...