Easy Money With Bonds

Are you one of the investors who has overlooked bonds in your investment portfolio?  It's a good idea to balance out the risk in stocks with the security provided in bonds. But what are they exactly besides something giving you a fixed return over a fixed term.  You may be surprised to find out that the fixed income market has more than 10 times the money invested than in the stock market.  By learning the basics of bonds you'll be able to understand which one is best suited for you and you can begin to collect the easy money from the interest payments.

In the most simple terms, a bond is a debt issued by a company, or government that has an obligation to its owner.  So in many investing circles if you hear of a company "issuing debt" it means that they are selling bonds for purchase.  The big difference between owning a bond from a company versus owning a stock in the company is that the bond is backed up by a physical asset and you will get paid first in the case of default.  

A case of default is reached when the financial obligations of the company to its bondholders can't be met. Since those bonds are backed up by physical assets, they can be liquidated to pay off the bondholders.  In the case where the company becomes bankrupt, the bondholders will receive their investment back before any shareholders.  So if, after the company sells off all of their assets and there is just enough money to pay off bondholders, then no shareholders will get any money.  All this to say that being a bondholder in a company is a much safer place to be than a stockholder because they get paid first.

When researching bonds you'll come across a lot of different terms that may be unfamiliar to you, especially when dealing specifically with bonds.  Here a few:
Debenture - Basically the same thing as a bond except not backed up by a physical asset like a bond.
Coupon - This is the term given to the money you receive as a bond investor.
Coupon Rate - This is the interest rate paid by the bond.  Usually given as a percentage per year (6%/yr).
Floating-rate Securities - These are bonds that don't have fixed coupon rates.
Par Value - This is the amount of money that the issuer will pay at the end of the bond contract (maturity date).

After bonds are purchased from the issuer there is a secondary market where they can be bought and sold again.  Pricing of these bonds is a complicated process that requires its own treatment however for the purposes of covering the basics there are two things to look at; price and yield.  Bond prices are quoted using an index with a base value of 100.  Even though bonds are issued in specific denominations (usually $1000), having a base value of 100 brings any value of bond to the same value so that an apples to apples comparison can occur. When a bond is trading at a value of 100 it is said to be at par.  Values below 100 are said to be trading at a discount, whereas values above 100 are trading at a premium.

The second aspect of bond pricing, and far trickier, is the yield.  The yield is the percentage annual return of the bond when held to maturity.  The yield is a different measure than the coupon rate and they should not be confused.  The yield is different than the coupon rate as a result of the secondary market pricing of the bond at a premium or discount to par value.

What A Bond Quote Looks Like
If you're looking at buying bonds on the secondary market it is important to understand what you're getting in to.  Looking in a financial newspaper you might see something like:

Bonds and other fixed-income securities are a very large topic as they are a large investing marketplace that would be impossible to cover in one article, but hopefully this has been a good introduction.  The easy money with bonds is simply buying and holding them until maturity and collecting the coupon.  But with a little more information that you've gathered here, hopefully you will be able to find even better easy money with bonds.