Curious Cat Investing Dictionary: Bonds

Bonds - long term debt security that pays interest. Normally one bond will represent $1,000 in principle (par value) with a fixed interest rate through the maturity date (when the principle is paid off at full value). Normally bonds pay interest every 6 months.

Bonds are debt securities with a length of over one year.

  • Inflation Indexed Bonds - the principle is adjusted every 6 months by an inflation factor. Then the coupon rate is multiplied by that factor to determine the interest that will be paid. On the maturity date the final (inflation adjusted) principle balance is returned to the investor.
  • Corporate Bonds - bonds issued by corporations
  • US Government Bonds (treasury bonds) - bonds issued by the federal government (interest is not subject to US state taxes).
  • US Government agency bonds - bonds issued by federal government agencies such as Fannie Mae (mortgages).
  • Tax-Free Bonds (municipal bonds, munis)- the interest paid on municipal, local and state governments that are normally free of federal and state tax.
  • Short-term bonds - normally seen as bonds with durations of between 1 and 3 years.
  • Medium-term bonds - normally seen as bonds with durations between 3 and 10 years.
  • Long-term bonds - normally seen as bonds with durations over 10 years.
  • Interest - paid on interest bearing investments such as bonds and savings accounts.
  • Junk Bonds - bonds that are rated less than investment grade. The credit rating agencies (Moody’s Investors Service and Standard&Poor's) rate bonds AAA, AA, A... and those that are deemed to be below investment grade are called "junk bonds" - these bonds are speculative and pay a higher interest rate to compensate for the additional risk.
  • Zero-coupon bonds - instead of paying interest to the bond holder every 6 months (as bonds normally do) these bonds are just a promise to pay the face value (say $1,000) on a certain date.
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