Bonds are lower-risk and lower-return investments than stocks, which makes them an essential component of a balanced investment portfolio, especially for older or more conservative investors.
Introduction to Bonds
What’s the difference between Treasury bonds, notes, and bills?
Treasury bonds, notes, and bills are all fixed-income securities issued by the U.S. Treasury. The primary difference between them is their maturity dates and the frequency of interest payments. Treasury bills have the shortest maturities, ranging from four weeks to one year, and they only pay interest when they mature. Treasury notes are issued with maturities ranging from two to 10 years, and pay interest every six months. And Treasury bonds mature in either 20 or 30 years, also paying interest every six months.
Can inverted yield curves predict recessions?
An inverted yield curve is widely considered one of the most reliable indicators of an impending recession. An inverted yield curve has preceded every U.S. recession since 1955 with only one false alarm. Though the inverted yield curve observed in 2019, which preceded the short recession triggered by the COVID-19 pandemic, should hardly be interpreted as a predictor of that recession.Learn More: The Impact of an Inverted Yield Curve
Why are bond prices and yields negatively correlated?
Bond yields move in the opposite direction of prices because the bond’s coupon rate is fixed but the appeal of that bond and its coupon rate on the secondary market changes with economic conditions. If interest rates rise, bonds issued with lower coupon rates become less attractive to potential buyers, who could get a higher rate of return on a new bond. Subsequently, the bond’s price declines. An investor who buys that bond at a discount will receive coupon payments on the bond’s face value, not its market value, meaning their return will be greater than the official coupon rate. Yields decrease as bond prices rise for the same reason.Learn More: Understanding Bond Prices and Yields
How do I cash in my U.S. Savings Bond?
You can cash in most paper U.S. Savings Bond at a bank or credit union. The exception is Series HH bonds, which were discontinued in 2004. These need to be mailed to Treasury Retail Securities Services with a specific form. Electronic bonds can be cashed in online at Treasury Direct, which will transfer the proceeds to your checking or savings account within a couple of days.Learn More: How to Cash In Your U.S. Savings Bonds
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury securities that are pegged to inflation. They are meant to preserve the purchasing power of the investor’s principal.
A basis point is a unit of measurement for interest rates and other percentages in finance. One basis point is equal to 1/100th of a percent, or 0.01%.
Repurchase Agreement (Repo)
A repurchase agreement (repo) is a short-term borrowing arrangement in which a dealer sells government securities to investors with the guarantee they will buy them back shortly after (usually the next day) at a slightly higher price.
A yield curve is a line connecting the yields on bonds of equal credit quality but different maturities as plotted on a graph. The slope of the yield curve signals expectations of future interest rates and economic activity. A normal yield curve slopes upward since bonds with longer maturities usually have higher yields. When the yields on short-term bonds exceed those on long-term debt, the yield curve is said to be inverted.
A debenture is an unsecured loan certificate representing debt that is backed by creditworthiness rather than assets.