| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Tips for evaluating bond investments |
Bonds can be attractive investments: they have a history of lower volatility than stocks, and they have been a reliable source of income. Bond investing is far from simple, however.
A bond is a debt instrument of the issuer. A typical bond has a face value, a coupon rate, and a maturity date. When an investor buys a bond, he or she is loaning money to the issuer in return for the promise of a stated rate of interest for a specific period of time.
At maturity, the face value of the bond is returned to the investor. Our government borrows money by issuing U.S. Treasury securities. Corporations sell corporate bonds to raise capital. States, cities and towns issue municipal bonds to fund the construction of roads, bridges and hospitals.
All other things being equal, the interest rate on a high-quality bond will typically be lower than the rate offered for a lower quality bond with the same maturity, because the issuer of the lower-quality bond must offer an incentive for a potential buyer to assume an additional level of default risk.
U.S. Treasury instruments have typically been considered to be of the highest quality, because the payment of interest and principal is backed by the full faith and credit of the U.S. government. A number of credit agencies evaluate the credit-worthiness of both corporate and municipal bonds. Many of the highest-quality municipal bonds are insured for the timely payment of interest and redemption of principal at maturity.
Most of the time, a bond with a longer maturity will have a higher yield than a bond of similar quality that has a shorter maturity date. In a flat or negative yield curve environment, however, there is little to no reward for locking up your money for longer periods of time.
If you buy a bond after its initial issue date, your yield may be higher or lower than the stated interest rate if your purchase price differs from its face value. Bonds, including U.S. government bonds, can incur capital losses or capital gains, if you purchase them after their initial issue date and/or sell them prior to maturity.
Bonds are traded on the open market; their price is affected by the direction of interest rates since initial issue, changes in credit quality, and other factors. If interest rates rise after you purchase a bond, its price will decline, and vice versa.
If a bond’s credit rating is downgraded, its price will decline. When faced with a downgrade, an investor must decide whether to sell early, possibly at a loss, or risk holding the bond to maturity, with the hope that the bond will be redeemed at its face value. As a bond approaches its maturity date, outside criteria have a diminishing effect.
Interest on corporate bonds is taxable by federal, state and local governments. Interest on U.S. Treasury bonds is federally taxable, but it is exempt from state taxes. Municipal bond interest is generally exempt from federal income taxation.
In addition, if you reside in the state in which the municipal bond is issued, the interest may also be exempt from state and taxation as well. To compare rates on a tax-equivalent basis, use this formula: the tax equivalent yield equals the tax-free rate divided by 1 minus your tax bracket.
For example: Assume you are in the 25 percent federal tax bracket and a 5 percent state bracket for a combined tax rate of 30 percent. If the interest rate on a municipal bond is 3 percent, your taxable equivalent yield is 4.285 percent: 3 divided by (1 – 0.3) = 4.285.
If a Treasury bond is paying 4 percent, the taxable equivalent is 4.21: 4 divided by (1-.05), since Treasury interest is exempt from state but not federal taxes.
These are only some of the factors you should consider when evaluating a potential bond purchase. The NASD Web site is an excellent resource for additional information. Go to www.nasd.com and type “bonds” into the search box.
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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