Bonds receive a graded rating that reflects the risk associated with investing in a bond

Bonds receive a graded rating that reflects the risk associated with investing in a bond

A bond’s coupon is the annual interest rate paid on the issuer’s borrowed money, generally paid out semi-annually on individual bonds. The coupon is always tied to a bond’s face or par value and is quoted as a percentage of par.

Say you invest $5,000 in a six-year bond paying a coupon rate of five percent per year, semi-annually. Assuming you hold the bond to maturity, you will receive 12 coupon payments of $125 each, or a total of $1,500.

Accrued interest is the interest that adds up (accrues) each day between coupon payments. If you sell a bond before it matures or buy a bond in the secondary market, you most likely will catch the bond between coupon payment dates. If you’re selling, you’re entitled to the price of the bond plus the accrued interest that the bond has earned up to the sale date. The buyer compensates you for this portion of the coupon interest, which generally is handled by adding the amount to the contract price of the bond.

Bonds that don’t make regular interest payments are called zero-coupon bonds – zeros, for short. As the name suggests, these are bonds that pay no coupon or interest. Instead of getting an interest payment, you buy the bond at a discount from the face value of the bond, and you are paid the face amount when the bond matures. payday loans TN For example, you might pay $3,500 to purchase a 20-year zero-coupon bond with a face value of $10,000.

What Is a Bond Rating Agency?

A bond rating agency assesses the financial strength of a company or government agency and its ability to meet debt payment obligations, then assigns it a grade that reflects the level of confidence an investor should have in that company or government agency.

The top-rated bonds get AAA or AA rating, meaning they are considered low risk. The A and BBB rated bonds are considered medium credit quality and anything below that is considered low quality or, what some investors refer to as junk bonds.

There are three major credit rating agencies – Standard and Poor’s, Moody’s Investor Services, and Fitch Group – that are recognized by the U.S. Securities and Exchange Commission as the Nationally Recognized Statistical Rating Organizations. Morningstar has grown in status recently and could be considered the fourth primary rating agency.

Liquidation Preference

If the corporation or government agency that issued the bond goes bankrupt, it sells all its assets and pays back investors in a pre-determined order known as liquidation preference. The typical order is to start with senior debtors, which usually are bondholders and banks.

When senior debtors are paid, if there is money left over, it goes to the next category of investors, know as junior or subordinated debtors. These generally are large corporations or business entities. It’s possible that junior debtors will receive partial or no repayment at all.

What Are Bond Unit Investment Trusts?

A bond unit investment trust is a fixed portfolio of bond investments that are not traded, but rather held to maturity for a specified amount of time.

The length of time to maturity is set when the trust is formed and at the end of that, the investor receives his principal back, just as he would if investing in a single bond. Along the way, investors receive interest payments, typically on a monthly basis. This is considered a low-risk investment, though the fees associated with it can eat into the profits.

The bond unit investment trusts operate much like a mutual fund in the sense that you are investing in a large group of bonds and not just one. They are ideal for investors who want to spread their risk, but don’t have enough money or time to rate and select 10-15 different bonds to invest in.

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