Bonds & Fixed Income

What a bond is and how you hold one, how bond returns are made, how bonds are priced, evaluating one specific issue, its risks, costs and taxes, and where fixed income fits in a portfolio.

Lending money for a fixed, contractual return

Lessons

• A bond is a loan with a contract: what you are owed, and by whom — Four facts define a bond - issuer, par, coupon, maturity - and all four are contractual. You are a creditor, ranking ahead of every shareholder. (10 min)
• The schedule, and the part of the return nobody prints on it — A bond's cash flows are written down in advance. What those cash flows finally compound to is not, and that gap is where the quoted yield quietly makes an assumption on your behalf. (11 min)
• Rates up, price down: the mechanism, and exactly how far — A bond's price is not an opinion. Given a yield, it is the present value of a schedule - and the size of the move when yields shift is a number you can compute in advance. (14 min)
• Appraising one bond: three yields that disagree, and what the rating leaves out — A single bond has a coupon rate, a current yield and a yield to maturity, and they are three different numbers. The gap between the last of them and a government bond is the market's own estimate of what could go wrong. (13 min)
• Four risks, an invisible dealing cost, and why interest is often the worst-taxed return — Credit, rates, inflation and liquidity are four separate risks that a single word - safe - is routinely used to dismiss. The tax treatment of interest is the one most holders never price at all. (12 min)
• The job bonds do: a date, a sum, and a different response to the same shock — Only fixed income lets you name the amount and the day in advance. The diversification argument is the one usually made for it, and it is the one that has failed. (8 min)

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