Introduction To Bond Investing
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Learn how you can create a diversified portfolio with bonds.
A sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned about default risk.
Duration tells investors the length of time it will take a bond's cash flows to repay the investor the price he or she paid for the bond. A bond's duration is stated as a number of years and tells us how much a bond's price might change when interest rates change.
A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual dividends divided by the stock's price.
Most investment choices involve a tradeoff between risk and reward. The "Efficient Frontier" is a modern portfolio theory tool that shows investors the best possible return they can expect from their portfolio, given the level of volatility they're willing to accept.
A convertible bond is a bond the investor can exchange for a specific amount of company stock at a later date. It combines a bond and a call option. The bondholder can benefit if there's an increase in the stock's value. The amount of stock that a bondholder can acquire is subject to a pre-determined formula.
A zero-coupon bond or ‘no coupon’ bond is one that does not disburse regular interest payments. Instead, the investor buys the bond at a steep discount price; that is, at a price lower than its face value. When the bond matures, the investor receives the principal amount or face value. Common zero-coupon instruments include U.S.
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