Bonds and Debt Instruments
A 30 year, $1,000 bond with a 8% rate will pay $80/year for the term of the bond, and will never change. The rate is guaranteed. At the end of 30 years, you will then get your $1000 back.
Types of Bonds
There are two types of bonds:
- Coupon / Negotiable bonds
- Registered bonds
Now days registered is the most common. These are typical of bonds with a company in which the companies name and your name is on the face of the bond, and the company has record of you owning the bond.
Value in the Market
The value of bonds vary in the market 4 ways as shown below:
- With the quality of the bond
- With investors psychology
- With maturity date
- Inversely with interest rates
There are several different ways to invest your money in a company. The most common are shown below:
- Common Stock
- Preferred Stock
Of these, bonds are the most secure and will be paid off first if there are any problems with the company. Historically though they will also have the lowest yields.
Municipal bonds are issued for General Obligations and for revenue. They have one advantage over corporate bonds and that is they are tax-free. However, the risk on municipal bonds is generally higher (rule of thumb is 2 grades below corporate bonds). Be careful, since a broker usually gets higher commissions on municipal bonds so they have an incentive to sell these over corporate bonds.
US Government Bonds
These are the safest of all bonds, since the federal government backs them.