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?
Show Notes
Backpocket Brewing Penny Whistle: A Bavarian wheat with spice notes.
Betterment: The easy way to invest.
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Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
