Bonds are guaranteed by the issuer. The issuer promises the payment of timely interest and the return of your principal at the end. The end date is called the maturity date. Barring any unforeseen default by an issuer which is rare, your principal and interest is secure. Bonds do not have to be held by an investor for the full term. There is an active trading market with bonds. Bonds can be bought and sold in the market resulting in profits or losses. Bond prices fluctuate just like any security does.
The current and future price of a bond depends on a few factors. The most important factor is interest rates and whether they have gone up or down since a bond was purchased. For instance, if you buy our 6% bond for 5 years today and you paid $1000 par value for 1 bond, your hope is that interest rates decline after the bond is bought. If interest rates declined to 5%, your bond will be valued higher and thus trade higher in price. New issues of bonds would only be coming out at 5%. Your 6% bond will be worth more. Conversely, if interest rise to 7%, your 6% bond will be worth less and thus will trade at a discount. These fluctuations in price are mostly relevant only when a bond may be sold. If a bond is bought and held till the maturity date, regardless of interest rate movements, your rate of return is fixed.
Tax Free Municipals
There are many factors that effect a bonds price and value. Bonds have credit ratings on them. Ratings agencies will rate a bond issue so an investor knows the credit quality of an issue. Standard and Poors (S&P) and Moodys are the 2 main ratings companies. A U.S. Government bond will have a AAA rating automatically. These bonds will typically not yield as high of a return as lower rated bonds. AAA is the highest, but you can buy lower rated bonds without really worrying about the credit quality of an issuer, to a point. Bonds that are rated Baa/BBB and higher are considered “Investment Grade”. These bonds, although not AAA are hardly “Junk Bonds” and thus should pay off fine. The length of the bond will effect the price as well now and in the future. If the investment is long term, it will be more susceptible to interest rate movements and thus change in price more often. The longer term bonds will provide a greater rate of return because of these risks.
Bond Trader
The current and future price of a bond depends on a few factors. The most important factor is interest rates and whether they have gone up or down since a bond was purchased. For instance, if you buy our 6% bond for 5 years today and you paid $1000 par value for 1 bond, your hope is that interest rates decline after the bond is bought. If interest rates declined to 5%, your bond will be valued higher and thus trade higher in price. New issues of bonds would only be coming out at 5%. Your 6% bond will be worth more. Conversely, if interest rise to 7%, your 6% bond will be worth less and thus will trade at a discount. These fluctuations in price are mostly relevant only when a bond may be sold. If a bond is bought and held till the maturity date, regardless of interest rate movements, your rate of return is fixed.
Tax Free Municipals
There are many factors that effect a bonds price and value. Bonds have credit ratings on them. Ratings agencies will rate a bond issue so an investor knows the credit quality of an issue. Standard and Poors (S&P) and Moodys are the 2 main ratings companies. A U.S. Government bond will have a AAA rating automatically. These bonds will typically not yield as high of a return as lower rated bonds. AAA is the highest, but you can buy lower rated bonds without really worrying about the credit quality of an issuer, to a point. Bonds that are rated Baa/BBB and higher are considered “Investment Grade”. These bonds, although not AAA are hardly “Junk Bonds” and thus should pay off fine. The length of the bond will effect the price as well now and in the future. If the investment is long term, it will be more susceptible to interest rate movements and thus change in price more often. The longer term bonds will provide a greater rate of return because of these risks.
Bond Trader