[...]... Contents Introduction Bond Building Blocks 1 PART ONE: TYPES OF BONDS Chapter 1 When Uncle Sam Needs a Dime: U.S Government Bonds 17 Chapter 2 The “I Hate Taxes” Bonds: Municipal Bonds 41 Chapter 3 Investing in America: Corporate Bonds 61 Chapter 4 Bonds Including the Kitchen Sink: Mortgage-Backed Bonds 69 Chapter 5 Going Global: International Bonds 83 Chapter 6 Paid to Wait: Convertible Bonds 93 Chapter... Stock 10 3 Chapter 8 It’s a Wrap: Wrapper Products xi 10 9 xii CONTENTS PART TWO: FIXED INCOME FUNDAMENTALS Chapter 9 My Word Is My Bond 12 7 Chapter 10 What Is It Worth to You? 13 5 Chapter 11 Riding the Curve 16 3 Chapter 12 A Volatile Relationship 17 1 PART THREE: FACTORS AFFECTING BONDS Chapter 13 Is It the Moon, the Fed, or Your Mother -in- Law That Gets Bonds to Move? 18 1 PART FOUR: FIXED INCOME INVESTMENT... entity 10 INTRODUCTION FIGURE I.4 Reinvestment risk 2002 when 20-year minicipal rates were 5 .11 %, thus providing $1, 277.50 in tax-free income a year, your annual income would take a $1, 565.00 hit In ation Risk In ation risk is the risk that in ation will erode away the money you make If you earn 7%, but in ation is 7%, you actually haven’t made anything You have 7% more dollars, but everything you... 25% Municipals 11 % U.S Treasuries 19 % $1. 69T $4 .13 T Asset-Backed Securities 8% $2.97T $1. 28T $3.82T Corporates 24% FIGURE I.5 The U.S bond market in 20 01 Data source: The Bond Market Association $2 .14 T Federal Agencies 13 % 14 INTRODUCTION Who Issued Them How the Interest Is Paid ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ U.S Treasury bonds Municipal bonds Corporate bonds Mortgage-backed bonds Foreign government bonds ✔ Foreign... trying to time the market securities financial instruments that you can invest your money in; bonds or stocks FIGURE I.2 Interest is paid twice a year Drawing by Ken Wright 6 total return a comprehensive measure of your investment’s performance It includes change in price, plus income, plus or minus any change in currency valuation if it’s denominated in a currency other than U.S dollars ∆ price + income... Bond Investing Credit Risk Credit risk, aka default risk, measures how likely it is that the issuer could get into financial difficulty and not make its interest and principal payments Of course, if the issuer is not paying investors their interest, or if the principal payment is in danger, investors will flee from the bonds; and the price of the bonds in the secondary market will plummet Researching the... prevent in ation from eroding away their profits, investors include an in ation premium in the interest rate they demand For example, if investors want to earn 3% and in ation is expected to be 3%, they will want the issuer to pay them 6% The first two rules governing fixed income interest are illustrated by the Figure I.3 You can see how yields increase as creditworthiness declines and as maturities get... sector tanks 13 What’s Your Flavor Liquidity Risk Liquidity risk affects thinly traded bonds If there is not sufficient interest in the bonds you are selling, you may have to really discount the price in order to entice buyers out of the woodwork WHAT’S YOUR FLAVOR During the 19 80s, fixed income investments transformed themselves from being pedestrian, safe-deposit box keepsakes to being the dynamic,... municipal bond in 19 81, its yield was around 11 .37% If you’d bought $25,000 face value, you would have been earning each year about $2,842.50 tax-free If you reinvested in 9 credit rating outside evaluation of a borrower’s credit standing and ability to pay financial obligations In the case of a bond rating, it evaluates the issuer’s ability to pay bond investors the money owed them outstanding has been... unfortunately, is when reinvestment options are less attractive In effect, the issuer returns your principal and causes you to reinvest in a new bond that will have a lower coupon In order to receive the same level of income, you may have to take on greater risk than before As the investing public has become more savvy, the number of callable bonds being issued has dropped dramatically 11 Event risk is the . Hannon Getting Started in Online Personal Finance by Brad Hill Getting Started in 4 01( k) Investing by Paul Katzeff Getting Started in Security Analysis by Peter J. Klein Getting Started in Global Investing. DeForge Getting Started in Internet Auctions by Alan Elliott Getting Started in Stocks by Alvin D. Hall Getting Started in Mutual Funds by Alvin D. Hall Getting Started in Estate Planning by Kerry Hannon Getting. Northwestern Investment Management Company The Getting Started in Series Getting Started in Online Day Trading by Kassandra Bentley Getting Started in Investment Clubs by Marsha Bertrand Getting Started