A bond’s real return = The bond’s quoted yield - the current rate of inflation. When people quote the interest rate on bonds or any other type of investment, they are almost always referring to the nominal rate of return. The nominal rate of … [Read more...]
Maturity, Duration, Effective Maturity and Effective Duration
Quick Definitions Maturity - Maturity measures the length of time in years it takes for a bond to complete payments of interest and principal. Most bonds pay their full face value or principal on the maturity date. The big exception is Mortgage … [Read more...]
How to Measure Inflation – The 3 Flavors of the Consumer Price Index (CPI)
Inflation is the upward change in price over time. Deflation is the downward change in prices over time. Inflation is very common, and when low, considered part of a healthy economy. Deflation is very rare and considered a sign of an unhealthy … [Read more...]
Non Agency Mortgage Backed Securities – What You Need to Know
Before reading this article, you should first read our article on agency mortgage backed securities. Non-agency mortgage backed securities primarily fit into two buckets: Mortgages for really expensive homes that banks cannot sell to an agency, … [Read more...]
Agency Mortgage Backed Securities (MBS) – US Govt Bonds That Yield Double or Triple Treasuries
Agency mortgage backed securities are bundles of mortgages which are packaged together as one instrument and sold like a bond. The payments from all the individual mortgages are then distributed to the holder of the agency mortgage backed … [Read more...]
Bond Mutual Funds vs. Bond ETFs
So you have read our article on individual bonds vs bond funds and have decided that bond funds are the best option for you. The next question you are probably asking is: Should I invest in bond mutual funds or Bond ETFs? Here are our … [Read more...]
Portfolio Diversification: How to Avoid the Number 1 Mistake In Investing
To make up a 50% loss on your portfolio, requires a gain of 100%. Let’s assume that you invest $100 and lose 50% of that $100 in the first year, leaving you with $50. The next year, you make 50%. However, a 50% gain on the $50 you now have in your … [Read more...]
How Much Income Should You Expect from a Bond Fund?
How do you know how much income you are going to receive from a bond fund and how dependable that income stream will be? Let’s start with the basics: Do bond funds have to distribute all the interest income that they collect from the … [Read more...]
Bond Funds: Distribution Yield, 12-Month Distribution Yield, and SEC Yield
When investing in individual bonds the most accurate representation of the income you will receive is the Yield to Maturity. A bond’s yield to maturity takes into account the bond’s coupon interest payments, the difference between the purchase price … [Read more...]
Bond Fund Total Return
Although most investors in bond funds focus on Yield, there are actually 4 components to a bond fund's return. Those who focus only on yield are missing the big picture, and could lose money as a result. The most important number is the fund’s … [Read more...]
Bond Covenants – What They Are, Why They are Important, and How to Use Them
By Michael M. Terry, CFA – Founder Rubicon Associates One often overlooked aspect of credit investing is the contract between the company and the investor. The formal name of the contract is the Indenture. The indenture contains the description … [Read more...]
Passive vs. Active Bond Funds: Which Option is Better for You?
Passively managed bond funds have the goal of exactly mirroring the performance of specified index. The job of those involved in managing passive funds is to replicate the performance of the index, by matching the holdings of the fund with the type … [Read more...]
All About Bond ETFs
Exchange Traded Funds, or ETFs for short, are mutual funds which trade on a stock exchange like the NYSE. In other words, ETFs trade just like stocks. When buying an ETF, you are not buying a piece of a company. Instead, you are buying a piece of … [Read more...]
Understanding Bond Mutual Fund Fees
Typically, there are three potential bond mutual fund fees. Load fees (which primarily go to the salesperson) Transaction fees (which go the brokerage firm) Fund expenses (which go to the mutual fund company) Here is a detailed explanation … [Read more...]
What is a Bond Mutual Fund?
Bond mutual funds pool the money of many investors into one large fund. This offers investors the benefits of diversification and professional management, which are often not available to individual investors buying bonds on their own. If you … [Read more...]
What is a CUSIP Number?
A CUSIP number is the unique identifier used for US bonds. There are CUSIP numbers for most US traded securities. However, the CUSIP number has primary importance in the bond market, where it is used to process and settle trades. Fidelity's CUSIP … [Read more...]
Accrued Interest – What it is and How it Works
Accrued interest is the amount of interest a bond has earned since its last coupon interest payment. Most bonds pay interest in a lump sum twice per year. For example, a $10,000 face value bond paying a 5.0% coupon with semi-annual payments, will … [Read more...]
How to Buy Municipal Bonds and Get the Best Price Possible
If you want to know how to buy municipal bonds, you should start by getting to know the retail order period, as this is where you are likely to get the best price. The majority of new municipal bond issues have a retail order period where non … [Read more...]
Municipal Bond Defaults: Don’t Believe the Hype
There are 2 big differences between Corporate and Municipal Bond Credit Ratings that investors interested in municipal bond defaults should be aware of . The supply of high rated municipal bonds is far greater than that of high rated corporate … [Read more...]
Total Return – What it is and How it Works
Total Return is calculated by taking the total dollar amount an investor has gained from holding a bond and dividing it by the initial purchase price of the bond. It includes all of the below factors: Simple interest Interest compounded on … [Read more...]