Bonds Essays

2095 Words Sep 14th, 2013 9 Pages
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The bond market is no exception to this rule. Bonds in general are considered less risky than stocks for several reasons: * Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer. * Most bonds pay investors a fixed rate of interest income that is also backed by a promise from the issuer. Stocks sometimes pay dividends, but their issuer has no obligation to make these payments to shareholders. * Historically the bond market has been less vulnerable to price swings or volatility than the stock market.
The average returns from bond investments have also been historically lower, if more stable, than average stock market returns.
Higher Risks=Higher Yields
A specific bond’s risk level is reflected in its yield, another name for return on a bond investment. “Current” yield is a function of the bond’s: * Coupon rate: the annual interest rate the issuer promises to pay the investor, stated as a percentage of the bond’s face value or “par,” which is the amount the investor can expect to have returned on the bond’s maturity date. * Current price, which may be a premium (more than) or discount (less than) in relation to the bond’s face or par value.
Yield-to-maturity reflects the relationship between the total coupon interest payments remaining between now and maturity, and the difference between

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