Navigating Investments: Exploring Bonds with Mr. and Mrs. Smith

Bonds: A Guide to Investing with Mr. and Mrs. Smith

I recently had the pleasure of meeting with Mr. and Mrs. Smith (real names withheld), a charming couple interested in delving into the nuances of the bond market. I set out on a mission to explain bonds and their place in the investing world while holding a warm cup of coffee.

“Bonds are like promises,” I said. “where investors lend money to governments or corporations in exchange for regular interest payments, referred to as coupons, and the return of their principal investment at maturity.”
Mr. and Mrs. Smith nodded in agreement, seeing bonds as a rock of stability in the face of the financial markets’ erratic currents.

I went on, taking Mr. and Mrs. Smith through the subtle differences between each asset class. “Now, let’s contrast bonds with another popular investment avenue: stocks,” I said.

“While stocks represent ownership in a company and offer the potential for growth through capital appreciation, bonds provide a fixed income stream and are considered safer investments,” I said.

Bond prices can change, though. “Imagine you’ve invested in a government bond,” I said. “Newly issued bonds will offer higher coupon payments if market interest rates rise, which will reduce the appeal of existing bonds with lower rates. Your bond’s value can drop as a result.” “Conversely,” I went on, “if interest rates fall, the fixed coupon payments of your bond become more appealing, leading to an increase in its value.”

The last moments of our meeting revealed a renewed sense of understanding and confidence on the faces of Mr. and Mrs. Smith. They had navigated the intricate web of the bond market and come out stronger and more knowledgeable.

Here is some more information on bonds below:

Bond Types:


Bonds are marketed in the markets under four main types. On some platforms, you might also come across international bonds issued by governments and multinational corporations.

Companies are the ones who issue corporate bonds. In many circumstances, companies choose to issue bonds for debt financing rather than applying for bank loans since bond markets provide better conditions and cheaper interest rates.

States and municipalities issue municipal bonds. Investors can receive tax-free coupon income from some municipal bonds.

Government bonds are bonds like the ones the US Treasury issues. Treasury bonds are referred to as “bills” if they have a year or less to maturity, “notes” if they have one to ten years to maturity, and “bonds” if they have more than ten years to maturity. It’s common to refer to all bonds issued by a government Treasury as “treasuries.” The term “sovereign debt” refers to national government-issued bonds.

Agency bonds are issued by entities connected to the government, such as Freddie Mac or Fannie Mae.

While bonds are not ownership, but are debt investments, they do offer clients a way to “smooth the curve” of price fluctuations over time. Although they do not bring the growth components that stocks bring to a portfolio, they do have a place for managing risk when needed.

 

Please see disclosures here.

GLEN HEDRICK, ADVISOR

The Wealth of Advice is a financial blog that is focused on retirement and wealth information, with a little of everything else sprinkled in.

I manage portfolios for clients and myself at Old North State Wealth Management.

Disclosures can be found here.

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