5 essential points for Bond Investing

Bond Investing requires simple routine or discipline.

This checklist is arguably even more important for bonds than it is for equities, since bond markets are portrayed, often correctly, as being more conservative investments.

1 When do the bonds mature? All things being equal, longer-term tax-free bonds are much more risky than shorter-term bonds. A 20-year bond with a 7% coupon trading at par would fall in price by about -10% if interest rates were to go up by +1%, whereas a 5-year bond with similar haracteristics would only drop by about -4%. There is nothing intrinsically wrong, of course, in taking the more risky approach, but it is useful to have the risk quantified. One of the attractions of high-quality bonds as compared with stocks is that their risk is easily quantifiable.


2 Are the bonds good quality? The main point here is that with junk fixed-income securities the risks are multiple. A number of different factors can adversely affect weaker bonds - changes in credit ratings, industry trends, politics, internal corporate matters, among many others.


3 What are the prices of the bonds? To some degree, the price of all bonds is determined by interest rates, but with lesser bonds it is also determined by a number of other factors, one of which is liquidity. One of the major ttractions of the Treasury market is its high liquidity.


4 What is the coupon? A bond's coupon, established at the time the bond is issued, is the (usually) fixed rate of interest that is paid by the issuer, either annually or semi-annually. Higher coupon bonds tend to be less risky investments.


5 What is the yield? The "YTM" (yield to maturity) of a bond is a very rough-and-ready measure of the return that the bond will deliver over its life. A high YTM is better than a lower one under an ideal situation. You should invest minimum of 5% in savings bond and 5% in tax free bond. Click here to tomove from Bond Investing to Financial Planning Home Page