“Gentlemen prefer bonds.” -- Andrew Carnegie
In this chapter, you will
- Be introduced to the definition of bonds, their advantages and disadvantages, their risks versus reward characteristics, and their historical returns
- Explore the inverse relationship of interest rates and bond prices, a relationship that causes much confusion to many individuals in and out of the industry
- Examine various characteristics of bonds including maturity date, par value (aka face value), call provisions, bond quotes, and the principles of bond price behavior
- Review the various types of bonds from the least risky (Treasury bonds) to the most risky (non-investment grade, aka junk bonds)
- Explore the methods by which bonds are rated on the basis of their probability of default
By the end of this chapter, you should be able to
- Describe the various components, characteristics, benefits, advantages, and disadvantages of bonds and bond investing
- Explain the inverse relationship of bond prices and interest rates and how a bond could be selling at a premium or a discount to its par value (aka face value)
- Outline the major bond types and their risk/return profiles
- Identify and explain the method by which bonds are rated on the basis of their probability of default
Bonds are stodgy. Bonds are boring. Bonds are reliable!
Yes, Dear Students, bonds are stodgy and boring. However, bonds are reliable. Bonds bring stability to a portfolio. Bonds let us sleep well at night. Let’s explore the world of bonds and see if they belong in your investor’s toolkit.
- 8.1: Bond Basics
- What are bonds? How do they differ from stocks? What are the advantages and disadvantages of bonds? What are some of their characteristics? Let's begin our exploration of bonds by answering this questions.
- 8.2: Types of Bonds
- Let’s review the major bond types. We will start from the least risky to the most risky types of bonds.
- 8.3: Bond Ratings, Trading, and Quotes
- We will finish our Introduction to Bonds with a discussion of how bonds are rated, traded, and quoted.
- 8.S: Summary
- Congratulations ‒ You Have Finished Chapter 8 ‒ Introduction to Bonds