What you Need to Know About Bonds

As they can help reduce risk and increase income, bonds are an essential part of any investor’s portfolio. Many people choose bonds to lower their tax liability. However, it is important to recognize that bonds can be subject to many risks, including inflation risk, default risk, and liquidity risk.

Ratings for credit

Credit rating agencies assign Bonds a rating. This evaluates their financial health and predicts how likely investors will be to get back the principal and interest they have borrowed. Higher-rated typically have lower interest rates than those that are less creditworthy.

Coupon Rate

The coupon rate is a percentage the bond issuer pays bondholders each year in return for the bond’s continued holding until maturity. A $1,000 bond paying $50 per year at a coupon rate of 5% will earn $50 interest over its term to maturity.

Price

The secondary market prices bonds based on their face value, par value (which doesn’t change), maturity date and the interest rate that the issuer will pay. The price of a bond’s can fluctuate widely depending on many factors including market interest rates and credit ratings.

Duration risk

The duration of a bond is an indicator of the price’s response to changes in interest rates. Experts generally believe that bonds will fall by about 1% for every 1 basis point increase in interest rates. More read