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What are bonds?
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Bonds are loans
that are issued by corporations and local,
state, and federal governments to raise money.
They are dissimilar to stock, which represent
ownership in a company, a bond is a loan. A
bond contains a promise to pay back the loan,
called the principal, after a specified amount
of time. This amount of time is called the
maturity of the bond. A bond pays a specified
interest to you each year, the coupon, until
it matures. At this point in time you can
redeem the bond for its principal.
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How does a bond
make you money?
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The value of a
bond moves inversely to interest rates. If
interest rates go up then new bond will offer
high yields while your remains constant.
Therefore decreasing the value of your bond.
However, if the interest rates go down the
inverse relationship takes place and the value
of your bond rises relative to the value of
new bonds.
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Why are they
good for your portfolio?
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Bonds are good for
your portfolio because the conditions that are
usually bad for stocks are good for bonds.
This tends to even you the net loss/gain.
Another reason that bonds are good for your
portfolio is bond movement are predictable and
offer high income.
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What types of
bonds are there?
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Corporate Bonds
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These are issued
by individual companies, therefore the
reliability depends solely on the company.
These bonds a typically issued at $1,000 face
value. They generally pay interest
semi-annually.
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U.S. Treasuries
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These bonds are
backed by the Federal and due to that aspect
they are exempt from all forms of taxes. Here
are some types of Treasuries:
Treasury Bills(T-Bills): These are federal
issued by the federal government and mature in
3 months to one year. They are sold for a
minimum face value of $10,000.
Treasury Notes(T-Notes): These have
maturities ranging from over 1 year to 10
years. They pay interest twice per year. Their
mimimum investment ranges from $1000 to $5000.
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Municipal
Bonds(Munis):
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These are issued
by state, local and federal governments to
raise money to finance various operations. The
majority of these bonds are paid by individual
investors. Their price range is $5,000 and up.
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