Overview on Bonds

Individual Bonds

A bond is an interest-bearing security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity. Zero-coupon bonds pay both the imputed interest and the principal at maturity.

Reasons to consider individual bonds

  • Diversification
  • Regular income1
  • Potential tax benefits
  • Preservation of principal1

Find individual bonds

Types of bonds

U.S. TreasuryDirect debt obligations issued by the U.S. government, which uses the revenue from the bonds to raise capital and/or make payments on outstanding debt
AgencyDebt obligations issued by agencies of the U.S. federal government or by private agencies, called government-sponsored enterprises (GSEs), which are federally chartered, but publicly owned by their stockholders
MunicipalDebt obligations issued by states, cities, counties, and other public entities that use the loans to fund public projects, such as the construction of schools, hospitals, highways, sewers, and universities
CorporateFully taxable debt obligations issued by corporations that fund capital improvements, expansions, debt refinancing, or acquisitions that require more capital than would ordinarily be available from a single lender
High yieldDebt securities rated below investment grade2 based on the issuer’s weaker ability to pay interest and capital, resulting in the issuer paying a higher rate to entice investors to take on the added risk

New issue and secondary markets

Fidelity offers investors the opportunity to participate in both the new issue and secondary bond markets. Investors pay no commissions or concessions when participating in new issue offerings, but Fidelity charges a concession or commission in the secondary market. (See Fidelity Brokerage Commission & Fee Schedule (PDF) for more information.)

New issues have a significant presence in the bond market as issuers are constantly entering the market to “roll” their existing debt as well as create new debt. Accessibility of new issues varies for individual investors, with the Treasury market most accessible and the corporate market least accessible.

The secondary market is composed of bonds that were issued in the past and may be traded until redeemed by the issuer. Unlike equity markets where the universe of approximately 9,000 securities is available to trade at all times within market hours, the U.S. bond markets actively offer only a relatively small subset (tens of thousands) out of the more than 2 million unique bonds currently in existence. The composition of this offered subset also varies from day to day.

Fidelity makes it easy for you to view and select from our large inventory of new issue and secondary market bonds and CDs to meet your needs.

This article is taken from https://www.fidelity.com/fixed-income-bonds/individual-bonds/overview

This overview of bonds is a good idea to get started in the bond market.

First, a couple of cautions.  Let’s first take a look at corporate bonds.  Although these seem to be less risky, there is a tendency, especially recently to have large companies have rates that are less than reasonable given the risk that they actually carry.  Let me explain some more: if a company is rated as a junk lender, which would normally have a very high rates on its bonds, say 12-15%, the recent rate has been closer to 6%.  The reason for this is that everyone seems to be chasing yield.  When that occurs, the normal rate is driven down.  The reason that yield is being chased is that large pension funds are needing the rate to assure the payments that they have already promised.  So, the risk premium is being eroded.

The second caution is on government bonds.  Government bonds are trading at historic lows.  This would be great if the local governments weren’t bankrupt (see Detroit).  Accordingly, you cannot just look at the bonds and expect a risk-free return.  Instead, you need to look at the underlying security on the bond.  Thus, if it is secured by the “general faith and credit” of a municipality, then it is not any good.  If you find a bond that is backed by specific revenue streams like a wastewater plant, then you should be good.