Bond Invest

Bond Traits

Like all financial instruments, debt issues share certain characteristics. Knowing the characteristics of a bonds, and what they mean, is invaluable when investing in bonds. Below are 7 common bond traits shared by debt issues.

1. Issuer
The first and perhaps must fundamental trait is the entity offering the bonds. Is it the government or a corporation? If it is a government bond, is it a federal agency (such as FHA) or one of the federal, state, or local governments? If it is a corporate bond, is the company rated by Moody's, Standard & Poor's, or Fitch? If rated, what is the company' rating?

2. Collateral
Bonds are commonly secured in a variety of ways.

Asset Backed

Introduced in the 1980s, asset backed bonds are guaranteed by corporate equipment, property, and cash.

Debentures

These bonds are backed solely on the credit of the issuer. This sounds incredibly risky, but highly rated bonds should generally be considered safe.

Pre-Refunded

Bond offerings that are guaranteed by secondary bond offerings. Generally, the secondary offering is put into the safest investments possible such as treasury bonds and T Bills.

Mortgage Backed

These bond offerings are backed by pools of mortgage loans.

3. Par Value and Price are different
This is usually where bonds get confusing and readers' eyes start glazing over.

Stick with me, we can get through this together.

The par value of a bond is the principal that will be repaid at the end of the loan. The price is the amount investors are willing to pay for the bond. In fact, bonds may sell below par value when they are sold the first time!

Put another way, a bond can be traded among investors at any point in the life of the bond. The price an investor is willing to pay for a bond may increase or decrease. However, the par value - the principal returned at maturity - will NOT change.

It probably is still confusing, so time for another easy example

• Joe Investor buys a bond at par value for $1,000
• 2 years later, Chuck E Cash buys the bond from Joe Investor for $800.
• The price at the time of Chuck E Cash's purchase was $800. The par vale was $1,000.

4. Coupon Rate
The coupon rate is Wall Street giberish for interest rate. This simply refers to how much interest will be paid on the bond. The most important point about the coupon rate is that it is based on the par value NOT the price paid.

5. Maturity
The maturity date is when the loan ends. Anytime a bond is purchased, it is important to check how much life is left in the bond. Each bond type will have different definitions for short term, intermediate, and long term debt.

6. Common Conditions

Senior and Subordinated

A senior bond is given priority over subordinated in the event of loan repayment issues. Subordinated issues are generally shorter term and higher rates than their senior counterparts.

Floating Rate

Floating rate bonds feature variable interest rates that adjust on a predetermined schedule. This helps keep bond returns in-line with changing federal interest rates.

Convertible

No, it isn't a hot car that allows the sun to blind driver and passengers' alike. A convertible bond gives the investor the option of converting the bond to company stock at the maturity date. Conditions - such as how many shares and timing - are set at the initial bond offering.

Exchangeable

Like, a convertible bond, exchangeables give the investor the option of converting the bond to stock at the maturity date. However, unlike convertibles, the bonds options convert to a company differentthan the bond issuer.

7. Strings Attached
Yep, like all good things in life, bonds sometimes have strings attached to the offer.

Callable

A callable issue can be paid off by the company in the middle of the life of the loan. This has obvious interest payment savings for the company, and unrealized earnings for the bond investor.

Puttable

A puttable debt issue can be called in by the investor. That is, the company must repay the principal early. This has huge advantages for investors when buying risky bonds.