The Little Secret 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 an HTML form
Previous Articles Highlighter:
Debt Consolidation Using The Snowball Procedure (1)
That willpower is the one thing that many people deep in debt find hardest to generate. it's the one factor, often, that led to the sky-high debt in the first place, for these people, using the snowball approach may well be an advantage, despite the larger total amount paid out over the life of all the bills combined.
3 Things To Look For When Purchasing A New Florida Home (2)
After taking stock of your monthly income, monthly debt, and credit rating, you should have a good idea of how much money you can allocate to a house payment. A few additional costs you may want to consider are insurance costs, taxes, and lender fees.
Overcoming The Myths Of Receivables Factoring (3)
A good factoring company will provide the client with comprehensive aging and performance reports, as well as credit screening for new customers. In effect, the client will not lose control of their receivables.
New Tax For Andorra (4)
The reason for the introduction of the capital gains tax according to the Andorra authorities is to try to slow down the high property inflation seen in the principality in recent years.
Debt Consolidation What Is The Correct Amount Of Debt? (5)
Factor 3 - Look at the current interest rates and make a prediction about where they are headed, businesses also do this, it can possibly be a very difficult thing to be confident about, but general trends are not random.
Alternative Student Loans For Bad Credit Can Make The Difference (6)
If the borrower begins to pay off the loan early and makes regular payments, it may be possible to seek an alternative funding source to rewrite the loan to pay off the higher interest rate note and have lower payments for the life of the agreement.
Invoicing Methods And Factoring (7)
This gives both you and the factoring company some piece of mind that the customer isn't likely to walk away. The milestone arrangement is the best way to accomplish this goal.
Forex Trading - Keeping Disciplined On The Forex Market (8)
It's best to find a proven strategy and become an expert at using this strategy to make successful trade after successful trade on the forex market. The Number One Reason Why People Fail In The Forex Market You know, it's hard to say that most people fail just because they weren't willing to stick with one proven strategy, but unfortunately there is no bigger cause.
Families Borrow Big Despite Economic Pressures (9)
According to the net wealth section of the report, however, this factor rebounded into positive territory for the first time since the first quarter of 2006, with consumer debt being counteracted by increasing house prices and rising equities.
Introduction To Mutual Fund Investing (10)
They are different than stocks when it comes to fees and expenses. As with stocks, funds are subject to capital gains taxes. But a fund is sometimes subject to a front-end and/or back-end load.
Borrowers In Southern England 'Face Increasing House Costs' (11)
Oliver Gilmartin, senior economist for the Royal Institution of Chartered Surveyors, claimed that as London becomes an increasingly "property rich city state", consumers could be set to develop further difficulties making secured loan repayments.
Finance - How To Keep Up Monthy Payments (12)
Knowing exactly what you owe, what out goings you have and how much extra you can afford to pay out could mean that your debt problems can be resolved sooner rather than later.
UK Loans Cheapest In The World (13)
These facilities are not always available for other nationalities, with consumers in Finland unable to access current accounts while on holiday and instant-access saving accounts are rarities in America. The study noted that financial services firms in the UK give clearer advice to customers, presenting breakdowns of fees in a more transparent way than banks in the ten other countries included in the research.
Read The Fine Print In Equipment Lease Contracts (14)
If you haven't done so already, this is a good time to call your accountant to help you make the best possible deal and to understand it. Provisions for early termination, early buyout, subleasing and assignment protect lessees.
Britons Must 'Learn' To Cut Spending As Interest Rates Predicted To Rise (15)
Mr Spencer also claimed that "people simply have to learn" to limit their expenditure as soon as possible to avoid further financial pressures. Meanwhile, first-time buyers and those with debts accrued via personal loans and credit cards are said to face a particular shortfall in their disposable income due to predicted MPC rises.
Settlements, Notes, And Lotteries OH MY (16)
The most popular are structured settlements, mortgage or business notes and lottery winnings. Understanding how each one works is crucial to invest or utilize such funds. One characteristic that all these monetary packages have in common is that they are not paid in full through a lump sum, they are paid periodically through small payments until the full amount of such financial instrument has been delivered.
How You Can Make Money Trading Forex While Working A Day Job (17)
Please grab nice cup of tea or coffee and read on. If you have already tried you hand at trading the forex market I am sure you are aware it is not as easy as it looks.
Accounts Receivable Factoring- An Alternative To Bank Financing (18)
WHAT IS FACTORING? Invoice factoring is the purchase of a business accounts receivable at a discount. Rather than wait 30 to 60 days or longer for the receivable to be paid, the factor purchases the invoice and advances most of the balance up front.
Studying Student Loans Consolidation (19)
Loan debt consolidation is not an endless road of opportunity. You are allowed to consolidate once with a private lender, and then once more with the Department of Education.
Facts About Credit Cards Debt (20)
Credit agencies are immediately notified when a cardholder has defaulted or missed a payment. The result is that the consumer's record is marked. Bad credit is an awful thing to have, as people's credit scores suffer and make it very difficult to be approved for a loan to buy a house or car.
Newer Articles Highlighter:
Figures Offer Contrasting Pictures On Mortgage Lending (1)
According to the BSA, lending in June was impacted by higher interest rates following the decision by the Bank of England's monetary policy committee (MPC) to raise the base rate of interest a number of times this year.
Free Home Foreclosure Listing: Valuable Information? (2)
The chances of finding and purchasing an ideal foreclosed property with an outdated, unspecific free home foreclosure listing are very slim. www.TheForeclosureInfoSite.com brings you information on many different types of foreclosures.
'Less People' Switching Financial Suppliers (3)
With the MPC increases said to be causing pressure on homeowners' day-to-day finances - and in particular their ability to make secured loan repayments - more consumers are said to be choosing to stay with their current supplier.
Debt Ridden Brits Reside In Overdrafts (4)
"The message has to be if you are going to use your overdraft make sure your authorised limit is big enough and if it isn't tell your bank before you go over the limit", advised the company's chief executive Sean Gardner.
There Is No Due On Sale Jail (5)
This article will dispel any misunderstandings you may have about the due-on-sale and suggest a simple, yet effective strategy to get around it. Before we discuss how to get around the due-on-sale, we must understand what it is and where it came from.
Tracker Mortgages Could Be 'Attractive' Choice For Borrowers (6)
Figures from the lender also reported that borrowers opting for a discounted variable-rate mortgage on a two-year contract could save more than 1,000 pounds over the period of time than if they chose a fixed-rate deal which in turn could reduce pressure on their day-to-day finances.
Fall Noted In Property Price Growth (7)
According to the company, house price growth in the capital is currently twice as fast as the rest of the country. Over the last 12 months, property in London has risen by some 21.7 per cent with Westminster, Camden, Chelsea and Kensington reported to be particularly driving growth.
Buyers Need To Insure Property Is 'Affordable Now And In The Future' (8)
However, only three per cent of those surveyed said that the extra monetary pressures of bringing up a child would put them off expanding their home. The news comes after Yorkshire Bank research indicated that the average price difference between the two properties stands at 19 per cent (34,000 pounds), although this can rise up to 80,000 pounds for some of the cities which were analysed.
Hedge Funds Growth Open Doors To New Financing Options (9)
Contrary to the previous three months, that on average produced positive results despite most major global equity markets falling during the month. What markets did supply in June was a sharp increase in volatility.
How To Protect Yourself From The Ever Increasing Credit Card Fraud (10)
Keywords: credit, credit card, checking account alternative, debit card, identity theft, credit card fraud Along with increased technological advances it seems there are increased ways for the criminal element of society to find ways to take advantage of it for nefarious purposes.
Homeowners Selling Property 'To Avoid Rising Mortgage Costs' (11)
This is fine whilst the market remains strong, but the recent rises in interest rates are likely to dampen demand and may well result in some of these 'hidden repossessions' becoming real repossessions".
Fall Noted In Borrowing Outlook (12)
"As in March the current climate remains a tough one for retail financial services providers. With higher-margin consumer credit constrained by continuing bad debt write-offs, many are having to seek new ways of generating revenue from financially restrained consumers - or cut costs," he added.
How Do You Get The Best Credit Card Rates? (13)
The lower the rate, the easier it will be to pay off your debts. It is very much so worth some time comparing rates and fees. The simplest factor to consider is the annual percentage rate you are likely to be charged.
Adventures In The Real Estate Maze (14)
In fact, these days, the problematic nature of getting at the right loan has been multiplied several times. The sheer numbers of home loans available make life a little complex for one who is new to the house buying business to form an intelligent and objective decision.
How To Find Credit Cards Without A Bank Account When You Have Less Than Perfect Credit (15)
Other features that you want to be sure the issuing company offers include no annual fees, easy accessible customer support, and low percentage rates. Even more so than with regular cards, customer support is crucial for these types of cards so if they don't have good support scratch them off your list.
Why Is Umbrella Insurance Important (16)
In addition to your home and cars, liability associated with any other conveyances you may have, such as boats, motorcycles, and other recreational vehicles, may also qualify for coverage under the umbrella, depending on the insurance company.
8 Tips To Improve Your Forex Trading By 100% Now (17)
5. Back test your system. Candle by candle back testing your system will give you great feeling of confidence in you trading. 6. Use price action.
Hot Stock Picks For This Week (18)
Adolor Corporation (ADLR) Industry: Drug manufacturer Results/returns: up 37.6% this week and up 9.56% today alone! Rediff India Limited (REDF) Industry: Internet information provider Results/returns: up 34% this week.
7 Great Money Tips To Lead You To Financial Freedom (19)
The rule here is if you don't see it, you won't realize it and you won't miss it. Some of these deductions will reduce your taxable income and save you further on taxes (see your CPA and tax advisor for more info on this).
Great Tips On Lowering Auto Insurance Costs (20)
Many of these classes are free or offered at minimal cost by your local DMV (Department of Motor Vehicles) or DOT (Department of Transportation). For a listing, contact your insurance company and then your state departments (DMV and DOT).