Bonds FAQ

Municipal bonds are offered by local governments, states and cities. The interest of these bonds is not subject to federal income tax, and if the bondholder lives in the jurisdiction of the governing authority, the interest is exempt from state and local tax. Because of all of these tax advantages, the interest rates paid on […]

A bond mutual fund has within it multiple bonds, and for that reason it is impossible to lock in the payment rate or the principal, which you would be able to do if you were directly buying a fund. A bond mutual fund is an investment company which manages a portfolio of individual bonds. The […]

A “call” is when the issuer of the bonds has an opportunity to redeem the bonds after a certain specified amount of time has passed. This doesn’t guarantee a continuation of a high yield after the call date – it limits the appreciation of the bonds, and it makes the investment more risky. These call […]

Bond prices are heavily influenced by maturity – the longer the maturity, the greater the change in price for a change in interest rates. If interest rates rise, it would make a larger difference in the 20 year bond, as opposed to a 10 year bond. Because of this, bond fund managers will attempt to […]

Generally bond prices and interest rates have an inverse relationship – as interest rates drop, bond prices rise and vice versa.

Highest Quality Moody’s Standard & Poor’s High Quality Aaa AAA Good Quality Aa AA Medium Quality Baa BBB Speculative Elements Ba BB Speculative B B More Speculative Caa CCC Highly Speculative Ca CC In Default – D Not Rated N N

Bond quality is the rating of the creditworthiness of an issuing organization. There are organizations that specialize in judging bond quality. The higher the rating, the lower the risk of the investment. The rating system uses letters A through D. The only bond considered to be risk free is the U.S. Treasury Bond.

A bond is simply a certificate which the borrower promises to repay within a certain time period. For the privilege of using the money, the government entity, municipality or company will agree to pay a certain amount of interest per year, usually an exact percentage of the amount loaned. Bondholders do not own any part […]