Tahoe-Truckee Market Beat: Understanding fixed-income terminology
Special to the Sun
One of the best ways investors can achieve their goals is to educate themselves. The markets are full of unique terminology that can be difficult to understand, like a foreign language.
Fixed income investing has some interesting terms that bond investors need to know if they’re going to build their own bond portfolio or even to consult with an advisor.
Par is the term used to describe a bond that is trading at par value, so if you’re looking at a bond that trades in $1,000 increments, that would mean that bond is selling for $1,000.
If it is trading for more than $1,000, then it is trading at a premium. If the price is below $1,000, it is trading at a discount.
As the price moves up to a premium, the yield drops, and if the price lowers to a discount, the yield rises.
The coupon rate is the interest rate that the bond pays. If you buy the bond at par you’ll receive the coupon rate. The YTM or yield to maturity is the return you’ll receive if you hold your bond until maturity and the issuer does not default.
Bonds can have call provisions, which means that the issuer can call your bond from you prior to maturity. When you buy a bond, you can look into the call features. Some may be callable at any time, and others may have a set schedule.
The YTC, or yield to call, is the return you’ll get if your bond is called away from you. If the bond has multiple call dates, you can find the YTW — which is the yield to worst call — or the yield you’ll get if the bond is called at the worst possible time.
You could buy a long-term bond that matures in, say, 20 years and has a YTM of 4 percent — which is pretty good for an investment grade bond these days — but the YTW could be in three years at 0 percent, and if you get called, you won’t get any return on that three-year period.
It’s important to understand the call features of any bonds you are considering when making your investment decisions. Some bonds are non-callable which means that they can’t be called prior to maturity.
Education is very important is today’s complex world of investing.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.