For example, the 10-year US Treasury bond is mostly used as a benchmark for 10-year bonds in the market. For a comparison to be appropriate and useful, the benchmark and the bond being measured against it should have comparable liquidity, issue size, and coupon. Bond investors and fund managers use the benchmark bond as a yardstick for measuring bond performance and to understand what rate of return to demand in excess of the benchmark return. dollars, will decrease because of unfavorable changes in currency exchange rates.Essentially, the benchmark bond is a security which the prices of other bonds react to. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions and currency risk, which is the chance that the value of a foreign investment, measured in U.S. Investments in stocks and bonds issued by non-U.S. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. The market values of government securities are not guaranteed and may fluctuate but these securities are guaranteed as to the timely payment of principal and interest.Īlthough the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Investments in bonds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss.īond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline. If interest rates fall, refinancing will accelerate and you'll be forced to reinvest the money at a lower rate.Īll investing is subject to risk, including the possible loss of the money you invest. If interest rates rise, fewer people will refinance and you (or the fund you're investing in) will have less money coming in that can be reinvested at the higher rate. The families holding these mortgages may refinance (and pay off the original loans) either faster or slower than average depending on which is more advantageous. government, making them almost as safe as Treasuries.īecause mortgages can be refinanced, bonds that are backed by agencies like GNMA are especially susceptible to changes in interest rates. Some agency bonds are fully backed by the U.S. These bonds are typically high-quality and very liquid, although yields may not keep pace with inflation. Most agency bonds are taxable at the federal and state level. government can issue bonds as well-including housing-related agencies like the Government National Mortgage Association (GNMA or Ginnie Mae). Floating rate notes have a coupon that moves up and down based on the coupon offered by recently auctioned Treasury bills.Separate Trading of Registered Interest and Principal of Securities (STRIPS) are essentially Treasuries that have had their coupon payments "stripped" away, meaning that the coupon and face value portions of the bond are traded separately.Do you need income that fluctuates with inflation? Learn more about our TIPS funds. Treasury Inflation-Protected Securities (TIPS) have a return that fluctuates with inflation.Treasury bonds have maturities of more than 10 years-most commonly, 30 years.Treasury notes have maturities between 2 years and 10 years. Instead, they're issued at a "discount"-you pay less than face value when you buy it but get the full face value back when the bond reaches its maturity date. Unlike most other bonds, these securities don't pay interest. Treasury bills have maturities of 1 year or less.Treasuries are extremely liquid.Ĭertain types of Treasuries have specific characteristics: Because they're so safe, yields are generally the lowest available, and payments may not keep pace with inflation. You'll have to pay federal income tax on interest from these bonds, but the interest is generally exempt from state tax. These are considered the safest possible bond investments. Because governments are generally stable and can raise taxes if needed to cover debt payments, these bonds are typically higher-quality, although there are exceptions. Companies can issue bonds, but most bonds are issued by governments.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |