Bond Investing 101: The 3 Most Deadly Misconceptions About Bonds

Fearing a double-dip recession and another stock market fall, investors withdrew a whopping $33.1 billion from domestic stock mutual funds during the first seven months of this year according to the Investment Company Institute, the trade group for stock mutual funds. Many investors are now choosing an alternative that they deem safer: bonds.

While bonds are generally safer than stocks, it's still vital to understand the mechanics of an investment in bonds. So before we go further, let's do a quick review of what bonds are and why they're important.

When ordinary people borrow money, they ask the bank for a loan, mortgage or line of credit (aka credit cards). However, when extremely large borrowers, like corporations, municipal governments or the U.S. Department of Treasury want to borrow money, they don't run down to the local bank to fill out a loan application. Instead, they borrow money from the worldwide investment community via bonds. And by doing so, they make available a great opportunity for individual investors.

Large entities typically choose to borrow via bonds because they often pay a lower interest rate versus the rate on a bank loan. So when you buy a bond, you are essentially replacing the bank and becoming the lender to the entity issuing the bonds.

Because bonds are less risky than stocks, they're suitable for investors with more conservative goals. But regardless of whether you're conservative or aggressive, bonds are extremely important for diversification and should be a part of any well-diversified portfolio.

Keeping the basic structure of bonds in mind, let's delve into the three most common misconceptions of the notice bond investor.

Deadly Misconception #1: Bonds Aren't Risky
Many investors mistakenly think bonds are like a certificate of deposit. But this is absolutely not true.

Though bonds are less risky than stocks, that doesn't mean they aren't risky at all. Investors need to account for several different kinds of risk when they evaluate bonds, the most important being default risk and interest rate risk.

Default risk accounts for the chance that a company or government will simply stop paying their debts, meaning the bondholder won't get all the interest and/or principal he's entitled to.

Interest rate risk accounts for the chance that interest rates will increase in the future, making your bonds less valuable. We'll cover that concept in detail a little later.

Every almost all bonds come with a rating, which is an indication of the "quality" of the issuer of that bond. After all, a bond is a promise to repay the investor both the interest and the principal at a stated future date. If the investor becomes insolvent, the investor loses out.

The highest-rated bonds -- AAA -- are issued by Uncle Sam, the largest issuer of bonds in the world. If the U.S. government itself goes belly-up, investors probably have bigger things to worry about than their bonds.

But why would an investor purchase a bond rated less than AAA? Because bonds with the highest ratings have the lowest yields, and bonds with the lower ratings have higher yields. Corporate bonds earn the pejorative term “junk” if their rating is very low, and they pay the highest rates of all.

Deadly Misconception #2: The Coupon Rate Is Equal to the Rate of Return
To analyze a bond as an investment, you need to know 5 things: its par value (face value), maturity date, coupon rate, yield and price.

The bond's par value is the principal amount that the lender (investor) is lending to the borrower (issuer). Corporate bonds are typically issued in $1,000 increments. If a corporation wants to borrow $1 billion, it will issue 1 million bonds with a par value of $1,000 each.

The maturity date is the date on which the bond stops paying interest, and it's also the day the borrower repays the lender the par value of the bond. The maturity date is also sometimes referred to as the redemption date.


The majority of bonds are issued with an extended maturity date, sometimes as long as 30 years. But it's important to understand that regardless of the bond's maturity date, the investor can buy or sell it at any time. In fact, very few bonds are held all the way from issuance to maturity.

The coupon rate is the bond's expressed rate of interest. It determines the interest payment the bondholder will receive (usually annually or semi-annually). This rate is typically fixed for the life of the bond, although variable rate bonds are available.

Not all bonds have coupons. A zero-coupon bond does not make periodic coupon payments. Instead, investors purchase them at a discount to face value, and realize a return when the bonds are redeemed at face value at maturity. U.S. Savings bonds and U.S. Treasury bills are notable zero-coupon bonds.

If the bond's price stays equal to its face value, then the coupon rate will be equal to the bond's yield. Often called yield to maturity (YTM), think of the yield as the bond's annual rate of return. Investors tend to be confused by the difference between the yield and the coupon, so let's walk through an example.

Assume you purchase a 30 year bond for $1,000. The coupon rate is 6%. If you hold the bond for the full 30 years, you'll get $60 in interest payments each year (based on the coupon rate) and you'll get back your $1,000 in principal at the end of year 30. When you do the math, you'll see the bond yield is 6%, exactly the same as the coupon rate.

But if you buy a bond at a discount or a premium, the yield will be different from the coupon rate. If you purchase the same 30 year bond for $960 instead of $1,000, the yield jumps to 6.3%. It makes sense when you think about it -- you're getting the same annual payments for less money, so your return on investment is higher.

If you choose to sell your bond after five years instead of waiting the full 30 years, the issuer of the bond doesn't buy it back. Instead, you must find another investor willing to purchase the bond from you. Which brings us to…


Deadly Misconception #3: The Price of a Bond is Equal to Its Face Value
Now comes the tricky part. We're going to revisit the concept of interest rate risk that we introduced earlier.

Let's go back to the 30 year bond we bought in the first example. We've decided to sell it after five years, and we want to know what price we can sell it for. During the five years we held the bond, interest rates increased and new bonds pay coupon rates of 9% instead of the 6% coupon rate on our bond. We can still sell our bond, but the buyer will insist that he or she get the market rate of 9%.

Since you can't change the coupon rate on your bond, the only option is to sell it at a discount. In this example, for the buyer to get a 9% return on a 6% bond with 25 years left to maturity, he would pay you $705.32. That's a pretty substantial haircut from the $1,000 you paid.

Note that the price of the bond ($705.32) is very different from its par value ($1,000). The price fluctuates so that the yield on the bond always matches the going interest rates on bonds that are issued today.

As you can see, the value of bonds decreases when interest rates rise. Likewise, the value of bonds increases when interest rates fall. Today, with interest rates at or near historic lows, bond prices are at or near their all-time highs. For bond prices to increase, interest rates would have to drop even lower than they already have.
resource:  http://www.investinganswers.com/education/bond-investing-101-3-most-deadly-misconceptions-about-bonds
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5 Ways to Save Cash Each Day

By Jacky Grishan

Taking into consideration the way the economy, a person can certainly save a few dollars by being frugal. These simple and easy to apply techniques will enable one to be able to save quite a bit at the end of each month.

When you start using these simple techniques and cost saving measures, you will notice a world of difference, in your monthly budget. Notice the number of trips that you make to the mall every month. This can work out to be quite a dent in your budget. The reason being malls are expensively priced when compared to other options such as online. The reason for this is that malls have a whole lot of overheads that they need to address such as employee salary and all of that. This makes them more expensive than online shopping.

There are plenty of discount offers around and that is what you should check. If you are lucky you will be able to find offers that are as less as 20 to 50% of the overall cost. This will fetch you a huge amount of saving.

The next best option is to go ahead and buy replicas for you. There are several different wonderful shoes in replica shoes collection which are priced affordable. Compare the prices of the replica shoes with the originals and you will notice the difference in cost. Also, what you get is the very same design and style.

Try out home options. You don't always need to join an expensive gym to lose weight. You can try to go for walks or you might want to learn exercises from the internet or television and try them out yourself. Same is the case with a salon. You can wash and blow-dry your hair at home. You can ask friends who are good at styling or hair coloring to try that out on you. However, opt for this with enough caution. If you are good at something you can try and sell that to your friends. For instance make your own jewelry using beads and baubles.

Check the utility bills that strike your doorstep regularly. Are you ending up paying for services that you hardly ever use? Well, opt out of these services that you might have signed into when you bought the mobile phone or the services. This will bring back a whole lot of money into your pocket again. Check the appliances that you use and if they are switched off. This will go a long way in helping you cut down on costs.

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21 Things You Should Never Buy New

resource: Yahoo! Finance
If you're looking to get the most value for your dollar, it would do your wallet good to check out secondhand options. Many used goods still have plenty of life left in them even years after the original purchase, and they're usually resold at a fraction of the retail price, to boot. Here's a list of 21 things that make for a better deal when you buy them used.

1. DVDs and CDs: Used DVDs and CDs will play like new if they were well taken care of. Even if you wind up with a scratched disc and you don't want to bother with a return, there are ways to remove the scratches and make the DVD or CD playable again.

2. Books: You can buy used books at significant discounts from online sellers and brick-and-mortar used book stores. The condition of the books may vary, but they usually range from good to like-new. And of course, check out your local library for free reading material.

3. Video Games: Kids get tired of video games rather quickly. You can easily find used video games from online sellers at sites like Amazon and eBay a few months after the release date. Most video game store outlets will feature a used game shelf, as well. And if you're not the patient type, you can rent or borrow from a friend first to see if it's worth the purchase.

4. Special Occasion and Holiday Clothing: Sometimes you'll need to buy formal clothing for special occasions, such as weddings or prom. Most people will take good care of formal clothing but will only wear it once or twice. Their closet castouts are your savings: Thrift stores, yard sales, online sellers and even some dress shops offer fantastic buys on used formalwear.

5. Jewelry: Depreciation hits hard when you try to sell used jewelry, but as a buyer you can take advantage of the markdown to save a bundle. This is especially true for diamonds, which has ridiculously low resale value. Check out estate sales and reputable pawn shops to find great deals on unique pieces. Even if you decide to resell the jewelry later, the depreciation won't hurt as much.

6. Ikea Furniture: Why bother assembling your own when you can pick it up for free (or nearly free) on Craigslist and Freecycle? Summer is the best time to hunt for Ikea furniture--that's when college students are changing apartments and tossing out their goodies.

7. Games and Toys: How long do games and toys remain your child's favorite before they're left forgotten under the bed or in the closet? You can find used children's toys in great condition at moving sales or on Craigslist, or you can ask your neighbors, friends, and family to trade used toys. Just make sure to give them a good wash before letting junior play.

8. Maternity and Baby Clothes: Compared to everyday outfits that you can wear any time, maternity clothes don't get much wear outside the few months of pregnancy when they fit. The same goes for baby clothes that are quickly outgrown. You'll save a small fortune by purchasing gently used maternity clothes and baby clothes at garage sales and thrift stores. Like children's games and toys, friends and family may have baby or maternity clothing that they'll be happy to let you take off their hands.


9. Musical Instruments: Purchasing new musical instruments for a beginner musician is rarely a good idea.  For your little dear who wants to learn to play an instrument, you should see how long his or her interest lasts by acquiring a rented or used instrument to practice with first. Unless you're a professional musician or your junior prodigy is seriously committed to music, a brand new instrument may not be the best investment.

10. Pets: If you buy a puppy (or kitty) from a professional breeder or a pet store outlet, it can set you back anywhere from a few hundred dollars to several thousand dollars. On top of this, you'll need to anticipate additional fees and vet bills, too. Instead, adopt a pre-owned pet from your local animal shelter and get a new family member, fees, and vaccines at a substantially lower cost.

11. Home Accent: Pieces Home decorating pieces and artwork are rarely handled on a day-to-day basis, so they're generally still in good condition even after being resold multiple times. If you like the worn-out look of some decor pieces, you can be sure you didn't pay extra for something that comes naturally with time. And don't forget, for most of us, discovering a true gem at a garage sale is 90% of the fun!

12. Craft Supplies: If you're into crafting, you probably have a variety of different supplies left over from prior projects. If you require some additional supplies for your upcoming project, then you can join a craft swap where you'll find other crafty people to trade supplies with. If you have leftovers, be sure to donate them to your local schools.

13. Houses: You're typically able to get better and more features for your dollar when you purchase an older home rather than building new. Older houses were often constructed on bigger corner lots, and you also get architectural variety in your neighborhood if the houses were built or remodeled in different eras.

14. Office Furniture: Good office furniture is built to withstand heavy use and handling. Really solid pieces will last a lifetime, long after they're resold the first or second time. A great used desk or file cabinet will work as well as (or better than) a new one, but for a fraction of the cost. With the recession shutting down so many businesses, you can easily find lots of great office furniture deals.

15. Cars: You've probably heard this before: Cars depreciate the second you drive them off of the dealership's lot. In buying a used car, you save money on both the initial cost and the insurance. It also helps to know a trusty mechanic who can check it over first. This way, you'll be aware of any potential problems before you make the purchase.

16. Hand Tools: Simple tools with few moving parts, like hammers, hoes and wrenches, will keep for decades so long as they are well-made to begin with and are well-maintained. These are fairly easy to find at neighborhood yard or garage sales. If you don't need to use hand tools very often, an even better deal is to rent a set of tools or borrow them from a friend.

17. Sports Equipment: Most people buy sports equipment planning to use it until it drops, but this rarely happens. So when sports equipment ends up on the resale market, they tend to still be in excellent condition. Look into buying used sporting gear through Craigslist and at yard sales or sports equipment stores.

18. Consumer Electronics: I know most folks like shiny new toys, but refurbished electronic goods are a much sweeter deal. Consumer electronics are returned to the manufacturer for different reasons, but generally, they'll be inspected for damaged parts, fixed, tested, then resold at a lower price. Just make sure you get a good warranty along with your purchase.

19. Gardening Supplies: This is an easy way for you to save money, and all you need to do is be observant. Take a look outdoors and you'll likely find such gardening supplies as mulch, wood, and even stones for free or vastly reduced prices. Used garden equipment and tools are also common goods at yard sales.

20. Timeshares: Buying timeshares isn't for everyone, but if you decide that it suits your lifestyle, purchasing the property as a resale would be a better deal than buying it brand new: on average, you'll save 67 percent on the price for a comparable new timeshare. If you're new to timeshare ownership, give it a test run first by renting short term.

21. Recreational Items: It's fairly easy to find high ticket recreational items like campers, boats, and jet skis being resold. Oftentimes, they're barely used at all. As long as they're in safe, working condition, they'll make for a better value when purchased used than new.

Lynn Truong is the co-founder and Deals Editor of Wise Bread, a blog dedicated to helping readers live large on a small budget. Wise Bread's book, 10,001 Ways to Live Large on a Small Budget, debuted as the #1 Money Management book on Amazon.com.