Investors Ed – Bonds

Hello, I’m Frank Calderone. Today, I’m going to talk about bonds. Bonds can sometimes be a tough concept to grasp. I’m going to give you just a brief overview. What is a bond ? A bond is a loan that an investor, like yourself, makes to a corporation, federal agency, state and local municipalities, and other organizations for a certain period of time. In turn, the borrower or bond issuer will pay you, the bond holder, interest on that bond until it matures. The majority of bonds have a set maturity date. At maturity, the issuer or borrower will repay you the original price of the bond, also called face value or par value. Most bonds are issued in $ 1,000 increments. For example, if you purchase 10 bonds for $1,000 each, for a total of $10,000, at maturity you will receive $10,000 par value, plus the interest earned on the bond. Bond maturities can range from 1 day to 100 years, but most bond maturities range from 1 to 30 years. You may have heard the terms short, medium, and long –term bonds. These refer to the maturity length. Short and medium term bonds are those that usually mature in 4 to 10 years, while long-term bonds have maturities greater than 10 years. What are callable bonds? These are bonds that allow the issuer or borrower to retire the bond before it’s maturity. These types of bonds are very common and are outlined in the bond’s prospectus or official statement as callable.

The annual interest rate paid to the investor is called the coupon rate and is always based on the par or face value. For example, if the coupon rate is 3%, since par value is $1,000, as I mentioned earlier, your annual interest earned is 3% x $1,000 or $30.

There are a number of different types of bonds such as U.S. Treasury Securities (T-Bills, Treasury notes), Agency Bonds (Fannie Mae), Corporate bonds, and municipal bonds. The interest from U.S Treasury Securities and Agency bonds are only taxable on a Federal level. Corporate bonds are fully taxable on a federal, state, and local level. The interest from municipal bonds is tax free at the federal level, and also tax free on the state and local level as long as the investor resides in the same state as the issuer. Bonds have been a useful investment for those seeking a steady income. Many retirees purchase bonds for this reason.

Well, I hope I’ve given you some insight into bonds. If you have any questions regarding the material in this video, or would like a confidential discussion regarding your portfolio, please give me a call.

This is Frank Calderone, Branch Manager and Financial Advisor at Raymond James coming to you from my office in Armonk, New York.

Be well and remember – Knowledge is Empowering !!