Bonds are fixed-income investments that can play an important role in your portfolio. Learn the basics of bonds, including the various types, prices, and yields, and then find out how to add them to your investment plan.
Bonds are debt securities that act as a way to raise money from investors who lend money for a certain period of time. You can buy bonds from the government, a municipality, or a corporation that issues them. The issuer will agree to pay you a specific rate of interest during the life of the bond, plus the principal amount when that time is up and the bond matures.
You can cash in most paper savings bonds at your local bank or credit union—just be sure to ask your financial institution if it cashes savings bonds first. You may also be able to mail in your bonds to Treasury Retail Securities Services. If you have an electronic savings bond, you can cash it online at TreasuryDirect.gov by logging in and setting up the transfer of money to your bank account.
You can buy bonds through a broker or investment advisor, via a mutual fund or ETF, or online through a brokerage firm. You can also buy government and savings bonds through TreasuryDirect.gov, and may be able to buy them through a bank.
Bonds issued by the government are used to raise money to help fund the federal government and projects around the U.S. They are known to be safe and popular investments because they are backed by the faith and credit of the U.S. government. The U.S. Department of the Treasury issues the bonds, also known as T-bonds, with maturities as long as 30 years. You can buy them through TreasuryDirect.gov.
Bonds mature at different rates depending on the type. Treasury bonds have terms of 20 or 30 years, while corporate bonds may have a maturity as short as two or three years. If you hold the bond until maturity, you will likely get paid the interest and face value of the bond. You may be able to sell before the bond matures, but it could come at a cost.
Junk bonds are a type of corporate bond. They are high-yield, which means they’re riskier than other bonds. Junk bonds are usually issued by companies that have a greater risk of default and so they may not be able to obtain an investment-grade bond credit rating. The main risk of junk bonds is that the issuer of the bond may not be able to pay out the interest or face value of the bond.
Municipal bonds, also known as “munis,” are issued by states, cities, counties, or other government entities to help fund obligations and projects such as building schools or highways. There are two types of munis: general obligation bonds and revenue bonds. You can buy them through a broker or investment advisor, in a municipal bond mutual fund or ETF, or directly online through a brokerage firm.
In its simplest terms, face value represents the nominal value of a stock or bond. It’s the number you used to see on a physical stock or bond certificate. While face value applies to both stocks and bonds, it’s a far more important consideration for bond investors.
Bond coupon is a term for the interest payments made on a bond. It survives as part of investment vernacular even though technology has made the actual coupons obsolete.
Savings bonds are securities issued by the U.S. Treasury to pay for the government’s debts. By purchasing a bond, buyers lend money to the government. Then, when a bond matures, generally in 20 or 30 years, you can cash it in for its face value, which has accumulated interest over the years. U.S. savings bonds are considered one of the safest investments you can make because they are backed by the government.
Par value is the face value of a bond or share of stock as shown on the bond or stock certificate. Unlike the market value, the par values of stocks and bonds don't change. Par value has different implications depending on whether it’s for a bond or stock.
War bonds are debt sold by the government to fund military operations. Nations often market these bonds as not only investment opportunities, but also a chance to show patriotism.
Clean price is the price of the bond without factoring in the interest accrued between coupon payments. When you see a bond price quoted on a financial news website, you typically see the clean price. However, because bond investors rely on interest payments, the clean price excludes important information.
An intermediate-term fund is a bond mutual fund that invests in a basket of intermediate-term bonds, which are typically those that mature between 5–10 years.
Convertible bonds are bonds that are issued by corporations and that can be converted to shares of the issuing company’s stock at the bondholder’s discretion. Convertible bonds typically offer higher yields than common stock, but lower yields than straight corporate bonds.
A basis point is considered the smallest measurement of quoting changes to interest rates or yields on bonds. It is a way to describe one-hundredth of a percentage point (0.01%). Basis points are often used instead of percentage points when differences of less than 1% are meaningful and have a tangible effect.
A Triple-A (AAA) bond rating is the highest rating bond agencies award to an investment considered to have a low risk of default, thereby making it the most creditworthy.
The yield spread is one of the key metrics that bond investors can use to gauge how expensive or cheap a particular bond—or group of bonds—might be. In the simplest terms, the yield spread is the difference in the yield between two bonds.
Treasury bills, notes, and bonds are fixed-income investments issued by the U.S. Department of the Treasury. They are the safest investments in the world since the U.S. government guarantees them. This low risk means they have the lowest interest rates of any fixed-income security. Treasury bills, notes, and bonds are also called "Treasurys" or "Treasury bonds" for short.
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