| |
Ever borrow money from someone? Sure you have.
It happens all the time. Forget your lunch money?
Wanna buy a soda? Need cab fare? People borrow
money every day for all kinds of reasons.
|
|
| |
|
|
| |
Much
like people, large organizations such as corporations,
the federal government, and state and local governments
all need to borrow money occasionally. Unlike
you and me, it is awfully difficult for these
organizations to get as much money as they need
just with the promise to repay it the next day.
Instead, they have to agree not only to pay back
the amount they borrowed, but also to pay a little
extra in the form of a fee (interest) for the
privilege of borrowing the money.
|
|
| |
|
|
| |
Almost
all investors who buy bonds buy them because they
are generally safe investments. However, except
for bonds from the federal government, bonds carry
the potential risk of default, no matter how remote
that risk might be. Whether it is a high-yield
corporate bond or a bond sold by the sovereign
state of Virginia, there is always a chance that
the entity that borrowed the money will not be
able to make the interest payment. |
|
| |
|
|
| |
Bond
investments, ranging from government bonds to
non-junk corporate bonds and junk bonds, are an
important investment vehicle and an important
part of portfolio investing for many.
|
|
| |
|
|
| |
Bond ratings were developed as a way to indicate
how financially stable the issuer of the bonds
really is. Developed by third parties like Standard
and Poor's and Moody's, bond-rating services
give bonds letter or mixed letter and number
ratings based on the financial soundness of
the bond issuer. To complicate things, the rating
agencies use entirely different rating systems,
making it very important that you check what
the ratings mean before you make any assumptions.
The higher the rating, the higher the quality
of the bond, with Treasury bonds being rated
the highest and "junk" bonds being
those with the lowest ratings.
|
|
| |
|
|
| |
There are several important points to research
before investing in the bond markets, including
classification and description of bonds, corporate
bond market, the mathematics and movement of
bond prices, and the classes of investors as
well as the taxation of bonds.
|
|
| |
|
|
| |
There are also bond funds, which invest in
bond markets, as well as mixed bond/equity funds
that allocate money on both the stock and bond
markets as a way of diversification of risk
(these funds may also hold cash, which has the
lowest risk, but also usually the lowest fixed
return rate).
|
|
| |
|
|
| |
There are many types of bonds with different
risk/reward profiles, making them attractive
to different types of investors. For example,
there are zero-coupon bonds, municipal bonds,
mortgage-backed securities, corporate bonds,
government bonds, and U.S. agency securities.
|
|
| |
|
|
| |
There are also convertible bonds that have
options of conversion to equity interests of
the company issuing them (with lots of restrictions
and covenants).
|
|
| |
|
|
| |
In fact, bond markets have been a continuous
source for innovation, with recent developments
including such bond issues as the world's first
convertible negative coupon bond (where investors
pay a coupon to the issuer rather than the other
way around, issued by Berkshire Hathaway, the
Warren Buffett company).
|
|
| |
|
|
