The Truth About Bonds
Keywords: bonds
If you are new to investing perhaps you are not familiar with bonds. Before you get started, you need to understand some of the risks associated with bond investing. Most people assume that all interest-bearing securities are completely risk free, but this is not the case. Even if you know a lot about investing, you may not be aware of some of the risk characteristics associated with bonds.
The most important thing to take into account is the interest rate. The Federal Reserve (also known as the Fed) meets every 6-8 weeks to evaluate the health of the economy. At each meeting, the Fed renders a decision regarding interest rates.
If inflation is rising, the Fed will need to raise interest rates to tighten the money supply. If inflation is moderate or contained, the Fed will likely leave rates unchanged. However, if the economy is slowing down and there is very little inflation or maybe even deflation, then the Fed might decide to reduce interest rates to create a stimulus for economic growth.
The reason why you need to consider present and future interest rate levels is because as interest rates increase, bond prices go down, and vice versa. If you are able to hold your bond until maturity, then interest rate movements do not really matter, because you will redeem the principal upon redemption. But often, investors have to cash out their bonds well before the maturity date. If interest rates have moved up since you purchased the bond, and you sell it prior to maturity, then the bond will be worth less than your initial investment.
You should also be aware of the claim status of the bond you are buying. Claim status refers to your ability to liquidate your investment in the event the bond issuer goes bankrupt. If you are buying a government bond, such as a Treasury Bill, claim status is irrelevant, because the odds of the Federal Government going bankrupt are slim and none.
If you are buying a corporate bond, however, there is always a chance that the issuer could go out of business. In the event of liquidation, bondholders are given priority over stockholders. However, there are often different classes of bondholders. Senior note holders can often claim against certain kinds of physical collateral in the event of bankruptcy, such as equipment (computers, machines, etc.). Regular bondholders can not always claim against physically collateral, and are next in line after the senior note holders.
Next, you should always check the three main features of the bond you are buying; the coupon rate, the maturity date, and the call provisions. The coupon rate is the interest rate. Most bonds pay an interest rate semiannually or annually. The maturity date is the date that the bond will be redeemed by the issuer; simply put, the maturity date is when the company must pay back to you the principal you loaned to them. The call provisions are the rights of the issuer to buy back your bond prior to maturity. Some bonds are non-callable, while others are callable, meaning that the company can buy your bond back before maturity, usually at a higher price than what you paid.
Finally, you should also understand that if economic conditions become more favorable after you a buy a bond, and interest rates start to go down again, the issuer will likely issue a lot more bonds to take advantage of the low interest rates, and will use the proceeds to try to buy back any callable bonds it issued previously. So, when interest rates go down, there is an increasing likelihood that your bond will be redeemed prior to maturity, if in fact the bond is callable.
You should invest in bonds. However, you should also take into account the risk factors we have covered. Your portfolio should contain a mix of corporate, federal, municipal, and even junk bonds (there is always a default risk associated with junk bonds, but they pay a huge interest rate). Talk to your broker about diversifying the kinds of bonds in your portfolio and you will reduce your overall risk and maximize your return.
Jim Pretin is the owner of www.forms4free.com, a service that helps programmers make free HTML forms.
Previous Articles Highlighter:
Penny Stocks Can Be Lucrative (1)
Regulatory agencies sometimes classify them as a stock with a price below $2. But, generally speaking, a penny stock is any low-priced security that trades on one of two exchanges; the Pink Sheets or the OTC Bulletin Board.
How You Can Avoid Market Timing (2)
But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share. The primary drawback of using DCA is that you may not be maximizing your overall return.
Learn To Avoid Market Timing (3)
If there is an indication that a certain stock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed.
Why I Like Penny Stocks (4)
To find the right company, there are a few things you need to look for. Number one, you need to do some research and try to find out how many shares the company has in its float.
Why You Should Invest In Penny Stocks (5)
Just make sure you do your homework before you invest and you should do extremely well. Jim Pretin is the owner of www.forms4free.com, a service that helps programmers create a free web form with the code to email the web form responses.
How To Select Mutual Funds (6)
Sometimes there is no 12b-1 fee, it depends. Investors might be unaware of the 12b-1 fee because it is sometimes deducted from the share price, so in a way, it is an invisible fee.
What Is Breakup Value? (7)
You should know this information even if the company in which you are invested is doing well, because if the company folds quickly, it will be hard to sell the stock.
The FOREX Market Is A Goldmine (8)
A trader in Hong Kong may be exchanging currency with a trader in Australia while an American trader is sleeping. There are several different markets within the Forex exchange system.
Stock Market Basics (9)
Within an exchange, there is the primary and secondary market. The primary market is for the initial sale of shares in a company for the first time to the public, as with an IPO.
Introduction To The Forex Market (10)
The ask is the amount of foreign currency that someone is demanding in order to be willing to sell $1 U.S. base currency. The Forex markets are generally considered to be less volatile than then stock market because within the course of a trading day, it is highly unlikely for the value of a single currency to move all that much.
Is Your Stockbroker A Crook? (11)
Make sure your broker works for a reputable brokerage house and not some fly-by-night cold calling establishment. Make sure that your broker understands that you are aware of the fact that they make money every time a trade is executed.
Understanding Your Insurance Policy (12)
Keywords: insurance policy, insurance contract You probably have insurance, such as home, auto, or health insurance. Even though you pay a small fortune in premiums, you probably know next to nothing about the insurance contract itself.
What Mergers Mean For Your Investments (13)
(Sometimes, if one company is eliminated after the alliance takes place, the shareholders of the eliminated company will not receive shares equal to what they currently have; you might only receive 1 share in the new company for every 4 shares you had in the old company, and depending upon the current market price, this could actually decrease the overall value of your investment, so you might want to sell before the merger takes place) 3) How much is the acquiring company paying for the smaller company?
Introduction To Day Trading (14)
Some look for swings in prices that may last a few seconds or a few minutes. Such a trader literally will buy a stock and then sell it within a few minutes, or sometimes within 30 seconds or less.
Introduction To Mutual Funds (15)
The first is the management expense, which is a charge assed on your money to pay the manager of the fund. The second is the administrative fee, which is usually assessed annually to cover the costs of mailings, postage, etc.
Tax Consequences Of Municipal Bonds (16)
For our purposes here, we are going to concentrate on municipal bonds, which are highly sought after due to their apparent exemption from some or all taxes. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.
P/E Or PEG, Which Is Better? (17)
The P/E is the price-to-earnings ratio. It is used to calculate how expensive or how cheap a stock is relative to its earnings. Using it, an investor can get a sense of whether a stock might be overvalued or undervalued.
Common Investment Scams (18)
You should also steer clear of any emails you receive about offshore investing or prime banks. Offshore companies, thanks to the internet, are no longer faced with obstacles such as direct mail or long distance telemarketing.
Understanding Auto Insurance (19)
If you do not have Additional PIP coverage on your policy, call your agent immediately and find out if it is available. The next items listed on your policy are comprehensive and collision coverage.
Penny Stocks: A Good Investment (20)
To find the right company, there are a few things you need to look for. Number one, you need to do some research and try to find out how many shares the company has in its float.
Newer Articles Highlighter:
Risk Factors Associated With Bond Investing (1)
The reason why you need to consider present and future interest rate levels is because as interest rates increase, bond prices go down, and vice versa. If you are able to hold your bond until maturity, then interest rate movements do not really matter, because you will redeem the principal upon redemption.
Strategies For Investing In Mutual Funds (2)
Sometimes there is no 12b-1 fee, it depends. Investors might be unaware of the 12b-1 fee because it is sometimes deducted from the share price, so in a way, it is an invisible fee.
How I Reduce My Investment Risk (3)
Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment.
Introduction To Foreign Currency Trading (4)
Spot trades take two days for settlement. The other two types of foreign exchange markets are the forward and futures markets. In the forward market, the buyer and seller agree on an exchange rate and a transaction date is set for a specific time in the future, at which point the trade is executed regardless of what the rates are at that time.
Bonds Can Be As Risky As Stocks (5)
Most people assume that all interest-bearing securities are completely risk free, but this is not the case. Even if you know a lot about investing, you may not be aware of some of the risk characteristics associated with bonds.
What Is The Purpose Of Umbrella Insurance? (6)
When and if this happens to you, you need to be prepared. More often than not, people are sued and have no extra protection to block the plaintiff from going after their personal assets in the lawsuit.
Is Bond Investing Totally Safe? (7)
You should invest in bonds. However, you should also take into account the risk factors we have covered. Your portfolio should contain a mix of corporate, federal, municipal, and even junk bonds (there is always a default risk associated with junk bonds, but they pay a huge interest rate).
What You Need To Know About Day Trading (8)
Others look for changes in momentum and will hop in at the beginning of an upswing and then ride it out until the upswing is over. This is known as momentum trading.
Mutual Funds Make It Easy To Diversify (9)
Also, some mutual funds may pick companies based on ideology, such as a socially responsible or environmental fund. There are also index funds that simply invest in companies that are contained within a certain index, such as the Dow Jones, or the S&P 500.
Can You Lose Money Investing In Bonds? (10)
Your portfolio should contain a mix of corporate, federal, municipal, and even junk bonds (there is always a default risk associated with junk bonds, but they pay a huge interest rate).
Internet Investment Scams (11)
Sometimes, pump and dumpers will engage in short selling (short selling is perfectly legal; you borrow stock from someone else and immediately sell it, hoping that the price of the stock will go down in the near future so that you can buy it back at a lower price and return it to the lender at a profit).
Is The PEG Ratio Better Than The P/E (12)
For example, if a company has a P/E ratio of 30, and annual earnings-per-share growth of 50%, then the PEG would be 0.6, making this company an excellent buy because it is undervalued and the stock price will almost definitely climb.
Bonds Are Equally Risky As Stocks (13)
If inflation is rising, the Fed will need to raise interest rates to tighten the money supply. If inflation is moderate or contained, the Fed will likely leave rates unchanged.
Strategies For Combatting Market Timing (14)
An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months.
Managing Your Portfolio Yourself (15)
It is calculated by dividing the price for one share of stock by the earnings per share. Most companies have a P/E ratio between 15 to 25. Some companies trade at P/E ratios as high as 70 or higher, such as Google.
Why Should You Use The PEG Ratio? (16)
It is calculated like this: PEG = (P/E) / Annual earnings-per-share growth The lower the PEG ratio, the more undervalued the company is. A PEG ratio of 1 or less is considered excellent.
What You Might Not Know About Bonds (17)
If inflation is rising, the Fed will need to raise interest rates to tighten the money supply. If inflation is moderate or contained, the Fed will likely leave rates unchanged.
Investment Strategies For The Risk Averse (18)
This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go.
Commodity Trading - Commodities In Your Portfolio (19)
There\'s also an additional value to those types of investments, since some tend to move in the same direction as stocks and not opposite to them. Visit www.123onlinetrading.com to find more great information about commodity trading.
If Real Estate Licenses Came With Marketing Degrees (20)
I know this will sound harsh to many of you that are currently using this kind of advertising, but I am not sure how my real estate agent being photogenic will help them sell my home.