Bonds

In the lemonade example, the grandmother bought a bond when she lent $100 and contracted to get it back with 5% interest in a year. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates). One way to invest is to lend your money to others. In this case, it is called "buying a bond." If you buy a bond with a $10,000 face value and a 15-year maturity, and you hold it for fifteen years, you will get $10,000 back plus interest payments, normally every three or six months. The main difference between bonds and CDs or T-bills is that, with bonds, you get paid a higher interest rate (about 2% more), but you wait longer to get your money back (ten to thirty years). With CDs and T-bills, you get your money back in three months to two years. There are pros and cons to bond investments. Advantages Bonds give higher interest rates compared to short-term investments. Bonds are less risky compared to stocks. Disadvantages Selling bonds before theyre due may result in a loss, a discount. If the issuer of the bond declares bankruptcy, you may lose money.

Bond Rating One of the risks of investing in bonds is a default, which occurs when the issuer of the bond fails to make payments. To keep investors informed about the chance that a bond will default, companies such as Standard & Poors (S & P) and Moodys give ratings to bonds. The higher the rating, the lower the chance that a bond will default. S & P grades bonds from AAA, AA, A ... to D. Moodys rates bonds from Aaa ... to C. A strong company such as Disney gets AAA or Aaa. AAA or Aaa means the chance of Disney defaulting on a bond is very small. The low rated bonds, such as bonds issued by USAir, are called junk bonds. A junk bond is issued by a weak company that may have trouble paying its bills. To compensate the risk an investor takes in purchasing a junk bond, it pays high interest rates (10 to 15 percent). There are three types of bonds: Treasury bonds (T-bonds), municipal bonds (munis), and corporate bonds.

Treasury Bonds (T-bonds) The U.S. government is the biggest seller (issuer) of bonds in the world. Although our government runs up $5 trillion of debts, (money that is borrowed to run its budget), and spends more than 15% of its tax income to pay the interest on the debt, Uncle Sams bonds are safe. Of course, the interest rate on T-bonds is lower than those of corporate bonds. Generally speaking, the safer your money is, the less interest you will get paid. The kinds of bonds that kids are likely to buy are called U.S. Savings Bonds. These can be bought with as little as $25. Grandparents are known for giving savings bonds as gifts to their grandchildren. For more information about Treasury Bonds call 1-800-USBONDS or click here. Also, click here for Savings bonds information.

Municipal (munis) Bonds Muni bonds are bonds sold by municipalities to raise money to build public facilities such as schools, roads, water supplies, and stadiums. The advantages in buying munis is that the interest payments are free from federal and state income taxes. However, the downside is that, unlike Uncle Sam, local governments can have money problems, and sometimes may not be able to make interest payments. For example, when Orange County in California filed bankruptcy in 1994, some of the bonds the county issued were in default. Check the bond rating before you invest.

Corporate Bonds Corporate bonds are bonds that are issued by corporations such as Disney, IBM, and General Electric. These bonds work the same as munis except that their interest payments are taxable. Corporate bonds also receive bond ratings from S & P and Moodys.

Bond Price When you keep a bond until its maturity, you get paid the bonds face value, the same price you paid for the bond, plus the yearly coupon payments, which is a fixed amount based on the interest rate. Bond originally issued: Face Value : $1,000 Current Interest Rate: 10% The bonds yield reflects interest rate: 10% Yearly bond payment (coupon payment): 1,000 10% = $100 (fixed)

If you sell the bond prematurely, the bond's price can change, depending on the current interest rate and the fixed coupon payment. For example: Case #1 (Premium) Current Interest rate: 8% Yield : 10% - 2% = 8% Yearly bond payment : 1,250 8% = $100 (fixed) Bond price = $1250 (You make $250) If the current interest rate goes down to 8%, the bond's yield also reflects the 8%. Moreover, when the interest rate goes down, the bond's price must go up in order to keep the coupon payment fixed at the original issue amount. In this case, since the coupon payment must stay at $100, the bond's price goes up to $1250. It is sold at a premium (more than the face value) when interest rates go down. Depending on the interest rate at the time, the bond has to sell at a premium or discount to compensate for the change of interest rate. Conversely, the bond price will come down if current interest rates go up. Then, you will sell the bond at a discount (less than the face value). Case #2 (Discount) Current Interest rate: 13% Yield : 10% + 3% = 13% Yearly bond payment : 769 13% = $100 (fixed) Bond price : $769 (You lose $231) Bond prices and current interest rates are published daily in the financial sections of major newspapers. You can also find bond quotes on the Internet.

Real Estate
This investment could be buying a house, an apartment, or just plain land. Buying real estate is a bit expensive for a kid. If you are interested in real estate investments, you might consider real estate investment trusts (REIT), a public company that owns and manages a lot of real estate such as apartments, shopping malls, and office buildings. You can buy shares of REIT stock and not worry about managing these buildings.

Commodities
A commodity is anything from gold, silver, or oil, to farm products, such as cotton, soybeans, or meat. It can also be foreign currencies, such as yen, pounds, and lira. The prices of commodities are driven mostly by supply and demand. For

example, oil prices will go higher if there is a shortage. Investments in commodities are very speculative because their future demand is difficult to predict. These investments are best left to professionals, not kids. More information about commodities trading is available at the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) Web sites.

Collectibles
A collectible is anything from baseball cards, coins, stamps, or dolls to antiques. When you buy these collectibles, you hope to resell them for a profit some day. The downside of collectibles is that they can get stolen or damaged, resulting in losses. Also, they may not increase in value as they get older; some things actually lose value due to wear and tear. For youngsters, collecting baseball cards is fun, but not a sure way to make money. Click here for an example of a collectable Web site.
Within the bond market, there are a number of ways for investors to invest their money.

The term, fixed income applies to a persons income that does not vary with each period. What is Fixed Income? If an investor lends money to a borrower, the borrower pays interest once a month and provides the investor with a fixed income in the form of a security. This is referred to as a bond or as a corporate debt when a company does this. In contrast with return securities such as stocks, fixed income securities such as bonds are issued by corporations as a means of raising money in order to buy new equipment, or to pay for product development. Investors only consider giving money to a company if they believe that they will be given something in return, such as a pledge of part ownership in the company, company stock or the payment of regular interest based on the size of the initial investment, which is essentially the same as offering a bond.
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Fixed Income Terminology Bonds basically promise to pay interest on borrowed money. There are also a number of technical terms frequently used by bond traders and investors.

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Understanding Fixed-interest Investments Types of Fixed Interest Investing In Treasury Bonds

The Issuer is the entity, usually a company or a government that borrows money and pays interest to the investor. The Principal is the amount of money that the issuer borrows. The Coupon of a bond specifies how much interest the issuer must pay. The Maturity is the bonds end date, at which point the issuer must return the investors principal. The Issue is the bond itself. Indenture is the contract that states the bonds terms.

People who invest in fixed income securities, such as a retired person, may want to receive a regular, dependable payment to live on, but at the same time, not consume principle. An investor can do this with a bond and use the coupon payments as regular income. When the bond reaches maturity, the investors money is returned. In contrast, corporate bonds are issued by a corporation with the intent of raising money to finance the business. The term corporate bond, is sometimes used to refer to all bonds that are not issued by governments.
What is a Corporate Bond?

Corporate bonds listed on major bond exchanges are also called listed bonds. However, the majority of bond trading that occurs in developed markets takes place in decentralized, over the counter, dealer based markets, Some corporate bonds also include an embedded call option, allowing the issuer to redeem the bond before it reaches its maturity date. Corporate debt falls into several broad categories.

Secured debt vs unsecured debt Senior debt vs subordinated debt

As a general rule, more senior investors in a companys capital structure have a stronger claim to the companys assets in the event of a default. Compared to government bonds, corporate bonds have a higher risk of default. The risk depends on the stability of the corporation issuing the bonds, as well as market conditions and government regulations. Corporate bond holders are compensated for this increased risk with higher yields than government bonds.
What is a Government Bond?

In comparison to a corporate bond, government bonds are issued by a national government in order to denominate its currency. Bonds issued in a foreign currency are called sovereign bonds. Nations with high or unpredictable inflation sometimes find it economically unavailable to issue bonds in their own currency. As a result, they may issue bonds in a more stable foreign currency. The first government bond ever issued was issued by England in 1695 to pay for a war with France. Government bonds are sometimes seen as more desirable by investors because they are considered to be risk free. If the government finds it self unable to repay the principal, it can simply raise taxes in order to redeem the bond when it reaches maturity. There are instances, such as the Russian Ruble

Crisis in 1998, where a government has defaulted on its domestic currency debt, but such incidents are rare. In the United States, Treasury Bonds are denominated in US Dollars. In this case the term risk free means that US Treasury Bonds are free from credit risk, however there are still other forms of risk, such as currency risk for foreign investors, as well as sudden changes to the inflation rate. Inflation risk means that the principal has less purchasing power when it is repaid. As a result, most government bonds are indexed in order to provide investors with protection from inflation risk.

Read more at Suite101: Differences Between Different Types of Bonds: An Introduction to Corporate Bonds and Government Bonds | Suite101.com http://terry-long.suite101.com/differences-between-differenttypes-of-bonds-a169965#ixzz1aOduUnMa