Part 2: What is a Bond
What are they?
U.S. Government Savings Bonds: One Bond of Many
Did you ever get a bond for your birthday? If so, you likely received a U.S. savings bond. U.S. savings bonds are safe and convenient. You could easily get one from a bank (not anymore) or online. Also, you can buy them for as little as 25 dollars. When you buy, the United States promises to pay your bond back. The phrase “Full Faith and Credit” is an unconditional guarantee. All bonds carry risk, but federal government bonds are one of the safest. You can buy government bonds through TreasuryDirect.
Although U.S. bonds are nearly risk-free, other bonds can carry substantial risk.
Why would a company issue a bond instead of stock? Visit Investopedia to understand why a company would issue a bond instead of stocks.
How to Analyze Bond Risk
In contrast to savings accounts, bonds are not FDIC insured. Therefore, they are riskier. The risk they carry depends on how likely the company or government is to default on payments. Even governments can default on payments. For example, New York City almost defaulted in the 1970s. The City of Detroit declared bankruptcy in 2013. To learn more about corporate bankruptcy, the SEC explains how Chapter 7 and Chapter 11 bankruptcy works on their page.
Also, not all federal government bonds are free of risk. There are agency bonds, like bonds issued by Freddie Mac, Ginnie Mae, and Fannie Mae. You also want to familiarize yourself with bonds terms like junk bonds, investment-grade bonds, coupon, as well as credit ratings for bonds. Important ratios like the current ratio and the debt-to-equity ratio help in its analysis.
To analyze Bond Risk, take a look at Investing in bonds for dummies or The bond book which we have in the library. If you learn better by watching, the DVD Finance. Program 6, Bonds is also available to borrow.
Online, the database Morningstar has a virtual classroom with mini-quizzes after each short lesson. Go to the Help and Education Link on the Morningstar home page. Then, click on Bond Curriculum under the Investment Classroom section.
FINRA.org’s section on Bonds is worth visiting. FINRA, The Financial Industry Regulatory Authority, regulates the securities industry. Their section on bonds covers basics and investment strategies and important tips to take before you invest in bonds.
The Securities Industry and Financial Markets Association has a website, investinginbonds.com that contains information for investors about different kinds of bonds and how to properly evaluate them.
Make sure to read carefully to ensure a properly managed portfolio.