1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

Bonds, or fixed income securities, are purchased at par (or face value), mature at fixed date in the future where the underlying investor receives his upfront investment back, and pay a set coupon rate.  Essentially an investor is lending money to a corporation (or government entity) and in return receives income, and his or her money back at maturity. 

 

Coupon payments are an obligation of the underlying company or borrower.  If they are unable to make the payment at the agreed upon coupon dates (usually semi-annually, or every six months), the company can default and the bondholders can take control.  It can lead to bankruptcy.  Bonds have maturity dates out past one year.

 

Objectives and Risks

 

Because coupon payments are set at the beginning, they do not adjust for inflation.  For this reason, bonds don’t offer inflation protection.  Of course, investors can buy bonds with shorter maturity dates, which would allow them to reinvest in new bonds at higher rates once they mature. (Related: How does a bond's coupon interest rate affect its price?)

 

Bond yields are determined based on the likelihood of a company being able to pay the coupon and return the funds upon maturity.  Bond rating agencies, including Standard & Poor’s and Moody’s, help investors determine this likelihood.

 

Bond prices move in the opposite direction of interest rates. As interest rates move up, bond values fall.  This is because a bond at a lower coupon rate than what is available in the marketplace is less valuable. As such, it stated value will fall below par.  The opposite also holds – as interest rates fall, existing bond prices increase because their coupon rates are above market and at a premium to current yields.  The concept of yield to maturity helps equate bond yields to current market interest rates. 

 

How to Buy or Sell It

 

Individual investors can buy bonds from the same brokers that buy and sell stocks.  But supply is not as high, and bonds come in a wide array of shapes and sizes (based off of bond ratings, maturities, coupon rates, and terms.  Rather than trading commissions, brokers make their money off bid/ask spreads, or the difference between what they buy them from investors at and what they sell them to investors at. (To learn more, see the Bond Basics Tutorial.)

 

Strengths

 

Income, and principal back at maturity

Income is an obligation of the underlying company

 

Weaknesses

 

Low inflation protection

Illiquid investments

Default risk in lower rated bonds

 

Key Considerations

 

Liquidity:  Low

Historical Returns:  Medium

Inflation Protection:  Low


25 Investments: Cash
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