Bond

A bond is a fixed-income investment where an investor loans money to a government or corporation. In return, the issuer promises to pay regular interest (coupon) and return the principal (face value) at maturity.

Bond Basics:

• Face Value (Par): Amount repaid at maturity (typically $1,000)
• Coupon Rate: Annual interest rate paid on face value
• Maturity Date: When principal is returned
• Yield: Total return considering price paid

Types of Bonds:

Type	Issuer	Risk Level	Tax Treatment
Treasury	US Government	Lowest	State tax-free
Municipal	States/Cities	Low	Often tax-free
Corporate	Companies	Medium-High	Fully taxable
High-Yield	Lower-rated companies	Highest	Fully taxable

Bond Pricing:

• Bonds trade above/below par based on interest rates
• Interest rates rise → Bond prices fall
• Interest rates fall → Bond prices rise

Key Bond Metrics:

• Current Yield: Annual coupon ÷ current price
• Yield to Maturity (YTM): Total return if held to maturity
• Duration: Interest rate sensitivity measure
• Credit Rating: AAA to D (risk assessment)

Credit Ratings:

Rating	Quality	Default Risk
AAA-AA	Investment Grade	Very Low
A-BBB	Investment Grade	Low-Moderate
BB-B	High Yield (Junk)	Moderate-High
CCC-D	Speculative	High-Default

Role in Portfolio:

• Provide income stability
• Reduce overall portfolio volatility
• Diversify away from stocks
• Preserve capital near retirement

Bond Duration Rule: For every 1% change in interest rates, bond prices move approximately duration percentage in opposite direction.