Now you know the basics of bonds. Not too complicated, is it? Here is a recap of what we discussed:
- Bonds are just like loans or IOUs. Buying a bond means you are lending out your money.
- Bonds are also called fixed-income securities because the cash flow from them can be fixed.
- Stocks are equity; bonds are debt.
- The key reason to purchase bonds is to diversify your portfolio.
- The issuers of bonds are usually governments and corporations.
- A bond is characterized by its face value, coupon (interest) rate, maturity and issuer.
- Yield is the rate of return you get on a bond.
- When price goes up, yield goes down, and vice versa.
- When interest rates rise, the price of bonds in the market falls, and vice versa.
- Bills, notes and bonds are all fixed-income securities classified by maturity.
- Government bonds are the “safest” bonds, followed by municipal bonds, and then corporate bonds.
- Municipal bonds, issued by local governments or agencies can earn tax-free interest for residents.
- Bonds are not risk free. It's always possible – especially in the case of corporate bonds – for the borrower to default on the debt payments.
- High-risk/high-yield bonds are known as junk bonds and are issued by riskier issuers.
- Other types of bonds include convertible bonds, callable, and putable bonds.
- You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can buy government bonds through TreasuryDirect.
- Often, brokers will not charge a commission to buy bonds but will mark up the price instead.
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