Bonds Near All-Time Highs. Is Bond Investing Right For You?

Bond_at_50_06c77So, your grandma gave you a savings bond when you were a baby. Now what?

A bond is basically a loan to either a company or the Government, where in exchange for using your money, they pay you. A bond is just like a car loan or mortgage, except now you’re on the other side – you are the bank and you collect interest. There are three key characteristics you should know about a bond:

  1. Price: Just like stocks, bonds trade on a market and fluctuate in price. The more attractive the bond, the more people will want to buy it, and the higher its price.
  2. Coupon: The coupon represents a dollar amount that is paid to the owner of the bond each year. This amount stays the same for the life of the bond regardless of the bond’s price.
  3. Yield: The yield is the coupon payment as a percentage of the bonds price. So if the price is $110 and the coupon is $10, the yield is 9% ($10/$110). Remember: yield moves in the opposite direction of price – if the price goes up, yield goes down and visa versa.

Bonds are historically a less risky type of investment, with most of the returns coming from the coupons, not an increase in price. US government bonds, or “treasuries” as they’re called, offer super low returns because the chance of you getting your money back is almost certain – there’s virtually no risk. With riskier companies like banks, or automakers, you can earn a higher return because there is a higher risk they will go bankrupt and not pay you your money back. That’s not to say the chance of these companies going belly-up is high or that these bonds are very risky, the risk is just high-er. In fact, bonds are almost always less risky than stocks.

Bonds may seem like investments for your grandparents, but they are part of any well-diversified investment portfolio and its important to understand the basics.

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  1. […] has no “value” – it’s not like stock of a company that makes money and pays a dividend or a bond that pays a coupon (ask Warren Buffet). Those have a value that can be reasonably determined. Gold doesn’t earn […]

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