A few months ago we did an introduction to bonds episode. We wanted to get a little deeper into the topic and a listener, Eric, agreed to help us out.
As you heard in the disclaimer, this is a complex topic. Stick with it though, it will all make sense by the end of the episode.
There are many types of bonds but the most basic description would be, a bond is an IOU. A coupon is the interest payment and you get that on a semi-annual basis until the bond matures. At maturity, you get the face value back.
A government bond is a treasury bond. These are often the benchmark that other bond rates are based on.
Agency bonds are issued by government-sponsored agencies like Fannie May. Mortgage-backed securities are mortgages sold off by the mortgage lender. Corporate bonds are what many of us are familiar with. These are sold when a company needs to raise money.
A municipal bond is issued by a city, town, state, or even a water company to fund expenses. Even Yankee Stadium has bonds! The yields are lower but from a tax stand point, they are a good investment.
Bonds are affected by interest rates and their credit ratings. Triple A is the highest rating. Anything rated below Triple B- is considered a junk bond.
Since most of our audience are buy and hold investors, we don’t need to be concerned with bond pricing on a day to day basis. You just need to be happy with the coupon payments you will receive and the credit rating of the bond. This is why Treasury bonds are a good investment for buy and holders.
Phew, get all that?
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