Personal Finance 12 - Understand the Special Features of Bonds

As we mentioned in previous article, we know that our government only represents about 30% of our retirement income, the company retirement pension plan offers another 30 % and many of us do not have one. It is up to individuals to invest wisely short and long term in order to make up for the short fall if he or she would like to live comfortably after retirement without giving up some retirement plans. In this article, we will discuss the special features of bonds and debentures.

1. Callable bonds
a) Callable bonds means the bond issuers can recall the bond before the maturity date.
b) All Bonds are assumed to be non-callable, unless otherwise stated in the prospective when bonds are issued.
c) Like other bonds, investors wanting to sell a callable bond must find a buyer or wait until the maturity date.

2. Convertible bonds
Some bonds give bondholders the option of exchanging the security for a specified number of common shares of the company allowing the investors of a debt security the possibility of capital gain.

3. Retractable bonds
Retractable bonds permit the holder to shorten the maturity date are called retractable bonds.

4. Floating Rate
floating rate means that the bond interest rate changes according to the current government treasury bill rate.

5. Fluctuation of prices
a) Even though, When a bond is issued, the interest rate is fixed for the entire term but changing economic interest rates create some fluctuation of prices
Example:
The bond price is lower with interest rate of 5%, if other more recently issued debt securities are near 10%.
b) If interest rates have fallen since this bond was issued, it can be sold for a price greater than par at a premium.

6. Yield to maturity
a) Yield of the bonds mean the annual return from an investment expressed as a % of its market price
b) At maturity, holder of the bond receive the face value of the bond regardless of the price paid for it.
c) If there are accrued interest owing on a bond, but not yet paid than bonds are sold at a certain price, plus accrued interest.

7. Commission for bond selling
a) Commission is not charged on bonds, instead, the dealers add their profit to the buying or selling price known as spread.
Example:
$1,000 bond may be sold to a broker for $965, or purchased for $980. The broker makes $15 for purchasing and selling the same bond. The $15 is a spread.


I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:

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