Stock Market Basics: Reading a Bond Table
Bonds are often viewed as a safe investment tool to produce investment earnings. You won't earn as much as you might earn from buying and selling stocks, but there is often assured earnings when investing in a bond. Usually bonds are backed by corporations or the government so their coupons will be paid. There are exceptions, such as junk bonds that pay a higher coupon, but might not pay at all. You should only invest in bonds where the company or municipality has a high bond rating.
Before buying that bond you should understand the various aspects of a bond table.
Issuer: This is either the company, town, state or country that is offering the bond to be purchased. This can be a key factor in determining whether to invest or not, as just like with companies, some municipalities and states are stronger investments than others.
Coupon: This is the fixed interest rate you will be paid off of each time a coupon is provided. For example, if you have a bond you paid $1000 for and the coupon is 10% you will receive $100 for every coupon received. Coupons can be sent monthly, quarterly, or over another set period of time.
Maturity Date: This is when you receive the principal back on your bond. Using the example above, on this date you would receive your $1000 back. Maturity dates are often far off in the future. A bond listing Sep 22/25 means that the Maturity Date of the bond will be September 22nd, 2025.
Bid Price: The price someone is willing to pay for the bond. This is often factored based on $100. If a Bid Price shows as $92 that means someone is only willing to pay 92% of par value.
Ask Price: The price someone is willing to sell the bond for.
Yield: This often reflects the average annual return you will see until the bond matures. As a result the Yield figure may be higher or lower than the figure defined as the Coupon rate. This is also referred to as Yield to Maturity or the Internal Rate of Return.
Change: The price of a bond can change dependent on the Bid and Ask prices. That is defined using this figure.
Bond Rating: The strength of the company, town, state or country providing the bond to you as defined by Standard and Poor's or Moody's [in most cases].
When examining a bond to purchase, focus on Maturity Date, Issuer and Coupon. It is assumed you will be able to afford the bond. You don't want to select a Maturity Date that is 30 years from now if you're a 60 year old investor. Unless, of course, the bond is callable. If it isn't you might not see the Maturity Date.
Focus on the Issuer as well. Investing in a bond issued by Google or Apple would probably be a better decision than investing in a bond from your local computer store. An issuer's longevity and public perception are important, as you want to receive your Coupon and your principal at maturity. The Coupon is also important. You will have an amount of money tied into the bond. Your return needs to be worth your while. If you want an 8% coupon don't simply settle for a 4% coupon. You should examine your options.
Once you understand how to read a bond table you'll be able to purchase bonds from strong entities, with a Maturity Date you can handle, and a Coupon that is acceptable to you. Don't settle for what you're looking for in just one of these three sections, go for the best fit in all three areas.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.