How to Read Financial Bond Rates
In order to have a well-balanced portfolio an investor needs some investment in bonds. Bonds are a good way to provide security in a portfolio. Bonds are the way in which a corporation or government entity can borrow money from investors. That money is then paid back to the investors at a predetermined rate within a predetermined time frame. The interest rate of the bond is often called the coupon and the date it will be paid back is the maturity date. Bonds are often called fixed-income securities because the exact amount that will be paid back if held to maturity is known when the bond is purchased.
- Difficulty:
- Moderate
Instructions
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1
Understand the different types of bonds: U.S. government bonds, municipal bonds, corporate bonds and zero coupon bonds. U.S. government bonds are considered extremely safe; municipal bonds are also safe and are free from federal income tax. Corporate bonds can be less safe due to the fact that companies go bankrupt more often than government entities. And zero coupon bonds are those which don't pay interest but are purchased for a discount off the par value. So an investor may pay $600.00 for a zero coupon bond that 10 years out has a par value of $1,000.00
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2
Find a reliable source for bond reporting, such as The Wall Street Journal or Barron's, and become familiar with the reporting of bonds. Most sources have the same basic information. The first column is the issuer of the bond. This would be the government entity or corporation name.
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3
Look at the second column, which represents the coupon. The coupon is the interest rate that is being paid to the lender or bond holder.
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4
Note the maturity date, which is listed in the third column. This is the date that the bond can be cashed in by the purchaser.
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5
Locate the bid price, which is listed in the fourth column. This is the price that someone is willing to pay for the bond and is expressed in relation to 100. For example if a bid price on a bond is 89, that means someone is willing to pay 89% of the par value of the bond.
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6
Consider the yield, which is listed in the fifth column. The yield is the annual return until maturity. There may also be a small "c," which indicates that the bond is callable--or redeemable--before the maturity date and next to the small "c" the year that it is callable.
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