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Bond Basics for All Investors


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Just the basics of investing in bonds. What is a bond? Why buy bonds? Read and find out now.

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Bond Basics for All Investors

  1. 1. Jane Nowak, CFP®|MoneyGal2020: Focus on Investment Basics Individual Bonds 101Bonds are an often overlooked part of many investment portfolios. Unlike stocks, bonds areneither considered to be exciting nor are they likely to be the subject of a ‘hot’ tip from abroker or friend. The truth be told, bonds can be boring. But as an investor, even the ‘boringbond’ deserves your attention and understanding. Let me explain some bond basics thatinvestors need to know.What is a Bond?Simply stated bonds are IOUs. In exchange for the use of investor money, the issuer pays the investorinterest and returns the original investment amount at the end of the term. You may also hear a bondreferred to as a fixed-income security. U.S. Savings Bonds are an example of a bond.How do Bonds Work? Buy a Bond Receive Interest Payments Receive your original investment back at Short Term end of the term Medium Term Usually paid semi-annually Long Term
  2. 2. Jane Nowak, CFP Focus on Investment Basics – Individual Bonds 101 2In Terms of Risk, Where Do Bonds Stand in Relationship to Cash and Stocks?Comparing the risk/return profile of bonds to cash and stocks, bonds lie between cash and stocks.That means that holding cash is less risky and generally pays less than holding a bond. And, holdingstocks is generally more risky and often pays more than holding high quality bonds.When investing, the higher the reward, the higher the risk. An investor is paid for taking risk.******So, if you are ever offered a higher return than other bond investments are currently paying,beware! If it sounds too good to be true, it probably is! Return Stocks Bonds Cash RiskWhy Buy Bonds? 1. Bonds can be considered to be less risky than stocks. 2. Generally speaking, high quality bonds often have a lower correlation to stocks. 3. Bonds pay a steady income stream and typically pay more than interest bearing savings accounts. 4. Buying bonds can provide tax advantages for high income investors. -Depending on the type of bond purchased, interest received from some issuers can be tax advantaged or in some cases tax free.
  3. 3. Jane Nowak, CFP Focus on Investment Basics – Individual Bonds 101 3Who Issues Bonds?This is a list of the most common bond issuers that you will see. • Corporations • U.S. Federal Government • Municipal Governments • Foreign Corporations • State Governments • Foreign GovernmentsCharacteristics of Bonds: Issuer • Corporations • Governments • Government Entities Maturity • Long Term- more than 8 years • Intermediate Term – 3 to 7 years • Short Term – 0 to 3 years Quality/Rating • High Quality Bonds - AAA Rated • High Yield Junk Bonds -(risky)Low Rated Tax Status • Taxable • Tax Advantaged • Tax Exempt Callable • Callable –Yes • Callable- NoPotentials for Bond Buyer ‘Gotchas’ 1. Bonds often return less than stocks and may not keep up with inflation.
  4. 4. Jane Nowak, CFP Focus on Investment Basics – Individual Bonds 101 4 2. There is a risk of default (mostly with corporate bonds). -If a corporation goes out of business, it may not be able to pay (default) its bond holders their principle or interest. 3. Bond prices fluctuate inversely with interest rates. This becomes an issue in a rising interest environment when bonds are not held until maturity (for the whole term). Bond Prices Interest Rates 4. Bond prices are down when you want might want to sell your bond and get a higher rate of interest. Remember #3 above! When interest rates are moving up the price of your bond on the open market is going down. -Investors buy bonds as a low risk investment.On the surface bonds can be deceptively easy. If held to maturity with no company default or calloption, the bond will perform as expected. When an individual bond is sold before maturity, it is veryimportant for the investor to understand how interest rates, current bond price, quality of the bondwill impact the sale of the bond.©Forefield, Inc. All rights reserved.This information is for general financial education purposes only and is not a recommendation for buying or selling stocks.Consult your financial advisor before buying or selling stocks or stock products. Jane Nowak, CFP® Financial Planner and MoneyGal2020 is a Financial Planning andRetirement Specialist for Women in their Prime. She works at Kring Financial Management inAtlanta, GAFind Jane on Social Media at: Subscribe to Jane’s Newsletter: Securities offered through Triad Advisors, Inc. Member FINRA/SIPC