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Saturday, September 17, 2016

Bonds

Introduction
Bonds are a type of investment (debt based security).  Bonds are loans sold by companies to raise $. The investor that buys the bond gets the interest.  The interest rates can be variable or fixed.  The interest rates on bonds are called coupons.  The time the investor receives interest varies, but it is usually bi-annually.  They'll receive the principle on the maturation date. Some bonds are taxed others aren't. Bonds have different terms: short, intermediate, and long.
Coupons
A fixed interest rate doesn't change.  A variable interest rate does.  When Federal Reserve increase interest rates on banks, the coupon falls.  When the Federal Reserve decreased interest rates on banks, the coupon raises.  The interest rates the Federal reserve control is called the fed fund rate. Coupons are bigger for long-term bonds than short-term bonds.  Long-term bonds will lose more $ if fed fund rate increases compared to short-term bonds.
Taxes on Bonds
Government Bonds: Low risk/low return.  Taxed by the federal government.

Municipal Bonds: Higher risk/higher return.  If you purchase them in the state you live in, you wouldn't have to pay any taxes. If you purchase them from another state, you owe that state taxes. There isn't any federal taxes on municipal bonds.

Corporate Bonds: Highest risk/highest return.  These bonds are the riskiest because the company may default.  If that doesn't happen you will make a lot of $.

Capital Gains Tax: If you sell an investment, the IRS wants 20% of your profit.
Terms
Short: 1-5 years
Intermediate: 6-12 years
Long: 13 and above
Conclusion
Bonds are loans issued by companies.  You get a coupon and principal on the bond you purchase, as long as it doesn't default.  They have different terms and taxes.  They are good for retirement because they are safer than stocks.  One day I may get some bonds.
References
http://www.investopedia.com/
https://www.thebalance.com/the-federal-reserve-and-interest-rates-357315
http://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx
https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/duration
http://money.cnn.com/retirement/guide/investing_bonds.moneymag/index4.htm
Intro to Bonds
Bond Prices vs Interest Rates
Bonds vs Stock
Equity vs Debt

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