Bond Basics
This type of investment is essentially a loan you make to a government or company.
What is a bond?
These U.S. debt securities from the federal government are considered among the safest.
What are Treasury bonds/notes?
Add up periodic coupon payments and you get this steady cash flow benefit.
What is income?
Compared to stocks, bond prices usually move less, offering this portfolio benefit.
What is stability (lower volatility)?
You buy a $1,000 bond with a 4% annual coupon. The yearly interest is this amount.
What is $40?
This party borrows your money when you buy a bond.
Who is the issuer?
Bonds from state or local governments—often funding schools or roads—are called these.
What are municipal bonds?
When market interest rates fall, existing bond prices usually do this.
What is rise (go up)?
Combining bonds with stocks to smooth ups and downs is known as this.
What is diversification?
Over 5 years, that same bond pays this total interest.
What is $200?
The bond’s face value—the amount you lend and expect back at maturity—is called this.
What is the principal?
Fannie Mae and similar entities issue this category of bonds.
What are U.S. government agency bonds?
The sum of interest received plus any price change when you sell before maturity is called this.
What is total return?
An investor who relies on regular coupon payments is primarily seeking this.
What is income?
At maturity, your total received equals this, combining principal and five years of interest.
What is $1,200?
This date marks when the issuer repays the principal and the bond ends.
What is maturity?
When companies need to raise capital, they may issue this kind of bond.
What are corporate bonds?
This fixed percentage, applied to face value, determines the dollar interest you receive.
What is the coupon rate?
Older, lower-coupon bonds tend to trade at this when current market yields are higher.
What is a discount?
Selling that 4% bond early when new bonds pay 6% likely means your bond’s price does this.
What is falls (decreases)?
These payments, often made every six months, are the primary way bonds generate income.
What is the coupon (or interest)?
Among Treasuries, these shorter-to-intermediate dated securities sit between bills and bonds.
What are Treasury notes?
If you sell a bond before maturity at a lower price than you paid, you realize this.
What is a capital loss?
Holding a bond to maturity eliminates price risk at sale but leaves you with this risk that prices moved during the term.
What is interest rate risk (price fluctuation during holding period)?
A $1,000 face value bond pays 4% annually in two equal semiannual payments. Each payment is this amount.
What is $20?