5 Knowledge Bond Basics

You want to increase profit and improve the risk for their portfolios? The inclusion of bonds in your portfolio will make a portfolio more balanced, enhancing the diversity and minimise volatility.

You can start investing bond by learning some specialised terminology on the following bond market.
Initially, the bond market may sound strange, even with stock investors have experienced. Many investors only make speculative bonds through the speakers because they are confused before the complexity of this market. If fully understood, the bond is actually debt instruments (debt instrument) is very simple. Let's find out what are these terms.

1. Basic characteristics of bonds

Once the bond of a company loan. The loan portfolio by buying bonds of the issuing company. In return, the company will pay interest (coupon interest) for a period to be determined periodically available (usually annually or semi-annually) and to repay the principal at maturity, termination of debt.
Unlike stocks and bonds can vary significantly based on the terms of the contract, a document stipulated by law outlining the characteristics of the bond. Because each bond issue are not identical, to understand the terms correctly before the investment is very important. Specifically, there are six important characteristics when considering bond.
Maturity
The maturity date of the bonds is the day that the original loan ( principal ) or the nominal price (par) value of the bonds will be paid to investors, and the obligation to pay corporate bonds will end .
Guaranteed / No Warranties
A bond can be secured or unsecured. Unsecured bonds are called debentures ( debenture ), interest payment and principal repayment can only be assured by the reliability of the company issuing it. If the company fails, you can just get on very little from the initial investment. On the other hand, a secured bonds are bonds in which specific assets are pledged to the bondholders if the company can not repay its debt obligations.
Deals liquidation
As a bankrupt company, the company will return the money to investors in a particular order when all debts. Companies conducting pay investors after selling all his property. Senior debt (senior debt) are paid first, then the subordinated debt (subordinated debt) and the rest for the shareholders.
Coupon 
Contrary ie gross amount paid to bondholders, usually annually or semi-annually.
Tax Status (Tax Status)
While the majority of bonds issued by the company are taxable investments, there are some government bonds and local bonds (municipal bond) are exempt from tax, income and capital that has been thanks nontaxable bonds usually state or local.
Because investors do not have to pay profit tax, tax-exempt bonds will have a lower interest rate than equivalent taxable bonds. An investor must calculate the tax equivalent income (tax- equivalent yield) to compare with profits of taxable instruments.
Right to redeem bonds before maturity (Callability)
Some bonds can be paid by the issuer before maturity. If a bond has a call provision ( call PROVISION ), it can be paid sooner, at the option of the company, usually slightly higher than the nominal price. (Par).

2. Bond Risk

Credit risk (credit risk) / The risk of default (default risk)
Credit risk or default risk is understood as the case that both interest and principal may not be able to be paid at maturity.
Prepayment risk
Prepayment risk is the risk that a bond issue that is returned earlier than expected, usually through the provision invoked. Can see this is bad news for investors, because the company only motivation to repay soon as interest rates declined significantly. Rather than continue to retain a high interest investment, investors will stop to reinvest capital in an environment of lower interest rates.
Interest rate risk
Interest rate risk is the risk that interest rates there will be a significant change compared to what investors expected. If interest rates fall substantially, investors face the possibility of prepayment. If interest rates rise, investors will be stuck with a tool that is lower than the interest rate the reality of the market (market rate). As much as time to maturity, the investor must take greater interest rate risk, because the more difficult to predict the development of future markets.

3. Bond Rating

The bond rating agencies
The bond rating agencies most popular is the Standard & Poor's, Moody's and Fitch. These organizations assess ability to repay obligations of the company. The bonds 'AAA' to 'Aaa' means the senior bonds are likely to be repaid. Bond type 'D' is in the company is bankrupt. The bonds are rated from 'BBB' to 'Baa' or better known as "bond investment point" (Investment grade), this means that they are hard to be insolvent and tend to maintain stable investment. Bonds rated 'BB' to 'Ba' or lower is called "junk bonds" ( junk bond ), are more likely to bust, so they are more speculative and dependent on price fluctuations .
Sometimes companies will not release their bond to be evaluated, in which case investors just rely on your judgment to the decision itself. Because with each organization, the system does the same ratings and changes over time, so the study of the definitions ratings for bond issuances you are considering is extremely important.

4. The yield 

Bond yields are all methods of calculating profits. The yield to maturity ( yield to maturity ) is the parameter used most often, but understand some other profit calculation method is also very important in some certain situations.
The yield to maturity (YTM)
As mentioned above, the return to maturity (YTM) is the most popular of the profits. It calculates see if bonds are kept until maturity period and all coupon reinvested at the YTM rate bond interest rate is how much? By coupon hardly be reinvested at the same rate, the real profits of the investors would be quite different. Calculating return on maturity by hand would take a long time so it is best to use Excel formula 's Rate or YIELDMAT (Excel 2007) for this calculation. This function is simple financial calculator.
Current income (Current Yield)
Current income can be used to compare the bond interest income with dividend income stock. It is calculated by dividing the annual coupon amount in current prices of bonds. Remember that income is only part of income earnings, excluding capital revenues or losses that may arise. Thus, the investor is only interested in current income, profit is most useful.
Nominal income
Nominal income of the bonds is simply the percentage rate for the bonds is paid periodically. It is calculated by dividing the coupon payments annually in nominal value of bonds. It should be noted that nominal income earnings estimate accurately unless the current bond price equal to its face value. Therefore, the nominal income is used to calculate the differential profits.
Yields recovered (YTC)
An optional bond repayment (  callable bond ) are likely to be acquired by the due date. Investors realized that profits rose a little higher if the bonds were acquired at a preferential payment. A bond investors so might want to know if their income would be if the bond acquired in a certain day, which decide whether the risk is worth it or not prepaid. The easiest way to calculate the equation ie using Excel 'Yield or IRR in Excel, or financial calculator.
Income actually received (Realized Yield)
The yield of a bond shall receive should be calculated if the investor plans to hold bonds only in a certain time, not to maturity. In this case, investors will sell bonds, and bond prices in the future is expected to be estimated. Because future prices are difficult to predict, this income calculation is only an estimate profits. The best method of calculating income should be done using the Excel function YIELD or IRR, or use financial calculator.

Conclude

Although it looks complicated, but the bond market is still regulated by the balance of risk and profit like the stock market. Investors only need to master the terminology and the basic indicator to calculate the market factors become a familiar and bond investors have the expertise. Once you understand these important terms, the bond investment is much simpler.
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