Basics of Bonds

Understand fixed income investing. A bond is a loan you make to a government or company, on terms fixed at the outset.

Coupon, price and yield

The coupon is the fixed interest the bond pays. The price is what you pay for it, which moves. Yield to maturity combines both, and is the only figure that lets you compare two bonds sensibly.

Why prices move

When market interest rates rise, existing bonds paying lower coupons become less attractive and their prices fall. Longer-dated bonds move more sharply than short ones.

Credit risk is the real risk

A higher yield almost always signals a weaker issuer. Government bonds carry sovereign backing; corporate bonds carry the company's ability to pay. Read the rating, and understand what it means.

Tax-free and capital gain bonds

Tax-free bonds pay interest exempt from income tax, which raises the effective yield for higher-bracket investors. Capital gain bonds under Section 54EC defer tax on property gains, with a lock-in and a modest coupon.

Before you decide

Everything above is general. What is right for you depends on what you are protecting, what you already hold, and what you can sustain. That is a fifteen-minute conversation, and it is free.