More About Bonds
Monday, November 27th, 2006
Several factors need to be considered, while evaluating a bond for investment.
Interest rate / yield
A bond could have a fixed interest rate, a floating rate pegged to market rates, or even a balloon payment upon maturity (also called a zero coupon bond). Keep in mind that your actual yield may vary significantly from the nominal rate, depending on your purchase price.
Maturity period
Most bonds have a specified maturity date, upon which the bond is called in and redeemed for cash. There are some “perpetual bonds” which are never redeemed. Bonds could be short, medium, or long term bonds. The maturity date can make a difference to your overall yield.
Credit ratings
Credit ratings for bonds generally indicate how safe or risky the bond is considered; however, use this with caution. For example, Enron continued to be rated “investment grade” almost upto the end.
Other factors
Other factors that you need to consider are redemption bonuses, call or put options, bond insurance and tax status.
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