Appreciation Vs Preservation: Pt3. Bond Features & Risk

Welcome to the continuation of my introduction to stocks and bonds, appreciation versus preservation in the broader market. This part will focus on the features of bonds and the risk.

Bond Features

When you consider a bond for your portfolio, remember to analyze the key features;

  • Price
  • Stated Interest Rate
  • Current Yield
  • Maturity
  • Redemption features
  • Credit rating
  • Income tax Impact

I will go into details later in another series about each of these features but these are the factors that you should be considering whether a bond fits into your portfolio and meshes your personal investment goals.

Bond Risks

As a general rule, bonds, particularly U.S. governmental bonds, are considered less risky than stocks and are therefore considered a more conservative investment. The most basic risk is that an issuer may default, meaning you will not get your money back. You can also lose money in bonds if you are forced to sell when the interest rates are high. These are the three most formidable bond risk:

  • Credit Risk
  • This is the risk of default by the company issuing the bond, resulting in the loss of your principal investment. This is why bonds are rated, just like people looking for credit.
    • Interest-Rate Risk
  • If you are holding a bond to maturity, interest-rate Risk is not a terribly significant, since you will not be affected by the interest rate change. However, if you are selling a bond, you need to concern yourself with this rate of interest that ties in the yield of the bond.
    • Income Risk
  • This is a double risk; first that should you sell, you won’t get the full value(or par) and second that inflation will surpasses the rate of income you are receiving from the bond(know as inflationary risk).
  • All of these factors and insight are helpful tools to use when you are considering amassing a bond stake in your investment portfolio. Always remember, that investing should research before purchase and logical assessment over emotional ties.
  • Jamaal W Vetose

    President

    Todd Capital Investments

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