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how effective a board of directors is ultimately depends on the quality and conduct of its members and their ability to properly oversee and guide a company so that it can achieve its goals of building profitability and shareholder value | each member should bring to the table different expertise and skills that relate to the company s focus they must be able to work together harmoniously and constructively to achieve common objectives and fulfill fiduciary responsibilities their motivation should be the company s advancement rather than their own and therefore they must recognize and handle conflicts of interest that may arise additionally an effective board of directors maintains transparency of its oversight and decision making thus ensuring the accountability of its independent and ethical standards and conduct | |
what is the job of a board of directors | in general a board sets broad policies and makes important decisions as a fiduciary on behalf of the company and its shareholders issues that fall under a board s purview include mergers and acquisitions dividends and major investments as well as the hiring and firing of senior executives and their compensation | |
does a ceo outrank a board of directors | no the ceo who may be on the board and the directors work together on relevant company issues the board doesn t interfere with the ceo s handling of a company s daily operations but it has the authority to evaluate the performance of a ceo and remove them if deemed necessary | |
are board directors paid | insider directors are not typically compensated for board duties since they re most often company employees outside directors are paid the bottom linea board of directors is a group of individuals elected by a public company s shareholders to provide the expert and experienced guidance and oversight to ensure a company s profitability and sustainability the board has a fiduciary duty to make decisions and take actions in the interest of shareholders and stakeholders it operates independently of management and focuses on a company s major issues rather than its day to day operations | |
what is a board of governors | a board of governors is a group of people appointed to oversee the management of an institution the u s postal service the bbc the world bank numerous colleges and universities as well as professional organizations such as the cfa institute and regulatory bodies such as the financial industry regulatory authority finra all have boards of governors in the financial world the best known board of governors is that of the federal reserve the central bank of the united states understanding a board of governorsthe u s central bank s board of governors is composed of seven individuals who are appointed by the president and confirmed by the senate members of the board of governors serve 14 year terms running on a staggered basis to ensure continuity 2legally appointments to the board are to consist of a fair representation of the financial agricultural industrial and commercial interests and geographical divisions of the country 2 in practice appointments have predominantly been of academics and former banking professionals 1only one governor can represent a federal reserve district duties of the federal reserve board of governorsthe board of governors has seven of the 12 seats on the federal open market committee fomc the body responsible for setting u s monetary policy the current federal reserve board has six members with one vacancy as of may 2022 1the presidents of five of the 12 regional reserve banks make up the remaining members of the fomc the chair of the fed s board of governors is responsible for chairing the fomc 3the federal reserve board the board has authority over changes in reserve requirements and it must approve any change in the discount rate initiated by a federal reserve bank 43members of the board frequently testify before congressional committees on the economy monetary policy banking supervision and regulation consumer credit protection and financial markets they are also responsible for supervising the work of the regional fed banks including approving budgets and appointing directors the current federal reserve chair is jerome powell recent notable chairs of the fed s board of governors include there have been a total of 16 chairs of the board of governors of the federal reserve of the united states 5board of governors vs board of directorsnon profit organizations government divisions and higher academic institutions typically have a board of governors as their governing body rather than a board of directors corporations as required by law have a board of directors appointed to oversee financial decisions and business operations | |
when two or more boards exist within an entity the board of governors often reigns supreme as the decision making authority | who are the current board of governors of the federal reserve a maximum of seven governors can serve on the board of governors of the federal reserve the members of the current board of governors of the federal reserve are jerome h powell michael s barr lael brainard michelle w bowman lisa d cook philip n jefferson and christopher j waller 1who nominates and confirms the fed board of governors the governors of the board of governors of the federal reserve are nominated by the president of the united states and confirmed by the u s senate 1 | |
why are the fed governors appointed for staggered 14 year terms | the purpose of the staggered terms is to ensure stability and continuity 6who is the current chair of the federal reserve the current chair of the federal reserve is jerome h powell he was sworn in for a second four year term on may 23 2022 he assumed the role following his confirmation in february 2018 1 | |
what are the 12 banks of the federal reserve | the 12 banks of the federal reserve are the federal reserve banks of san francisco minneapolis dallas kansas city st louis chicago cleveland atlanta boston new york richmond and philadelphia 6the bottom linea board of governors is a group of highly qualified individuals responsible for overseeing and managing an institution most institutions from corporations to nonprofit organizations to media outlets to government bodies have a board of governors the most well known board of governors is that of the u s federal reserve board | |
what is a board of trustees | a board of trustees is an appointed or elected group of individuals that has overall responsibility for the management of an organization the board of trustees is typically the governing body of an organization and seeks to ensure the best interest of stakeholders in all types of management decisions | |
how a board of trustees works | a board of trustees typically includes key individuals involved with the management of an organization other individuals may be appointed or elected based on their expertise and experience in areas pertaining to the management of the organization the board will often have a mix of internal and external trustees a board of trustees is similar to a board of directors and may act as such in some organizations a board of trustees is more commonly found in private organizations entities with boards of trustees include mutual savings banks universities university endowments art museums and associations the phrase board of trustees can often be used interchangeably with board of directors board of governors or board of regents some entities such as public corporations and mutual funds may have requirements designated by industry regulations that pertain to the oversight and obligations of the board of trustees in some cases the board of trustees may be a special group tasked with managing a designated portion of a comprehensive organization the framework for a board of trustees is typically set by regulatory obligations and entity direction outlined in an organization s bylaws a board of trustees can range from three to 30 individuals boards are often divided into subcommittees which can help to manage target areas of an entity while also providing for some segregation of power the board of trustees often will be responsible for holding in trust the funds assets or properties that belong to others with a fiduciary duty to protect them two leading entities using the structure of a board of trustees include university endowments and mutual savings banks university endowmentsa university endowment may have a special board of trustees that is responsible for the oversight and management of a portfolio of assets known as an endowment the board of trustees has a fiduciary responsibility to manage the funds in the best interest of all stakeholders the board may choose to invest the endowment assets across a range of investments utilizing the services of various institutional managers in managing the endowment assets it may also choose to work with a single institutional manager in a separate account structure or take on the full duties of managing the assets itself regardless of the structure of an endowment portfolio the board of trustees has fiduciary responsibility for making all of the endowment s investment decisions mutual savings banksmutual savings banks have boards of trustees who ensure that the interests of the depositors borrowers and members of the community in which they serve are considered and protected by bank management the board has the duties of making sure that customers deposits are secured and invested safely interest is paid to depositors and customers principal is available to them on request | |
how does a board of trustees differ from a board of directors | a board of trustees is more commonly found in private organizations such as universities and art museums however a board of trustees is similar to a board of directors and may act as such in some organizations | |
how do industry regulations affect a board of trustees | in some cases a board of trustees may be a special group tasked with managing a designated portion of a comprehensive organization this is because some entities such as public corporations and mutual funds may have requirements designated by industry regulations related to the oversight and obligations of the board of trustees | |
how is a board of trustees framed | regulatory obligations and entity direction outlined in an organization s bylaws typically set the framework for a board of trustees the board can range from three to 30 people and is often divided into subcommittees which can help to manage target areas of an entity while also providing for some segregation of power the bottom linea board of trustees is a group of individuals who collectively have overall responsibility for managing an organization trustees are appointed or elected they are typically the governing body of an organization and seek to ensure stakeholders best interests in all types of management decisions | |
what is boil the ocean | boil the ocean is an idiomatic phrase that means to undertake an impossible task or project or to make a job or project unnecessarily difficult the phrase appears in business and among startup companies as well as in other group settings and is considered to be a negative phrase in relation to how one approaches a task understanding boiling the ocean in the literal sense boiling the ocean is impossible because there s too much water for boiling it to be feasible boiling the actual ocean would be an impossible task when applied to groups or projects the phrase can simply mean making something so complicated that the goal becomes impossible the phrase boil the ocean has the additional connotation of going overboard or delving into such minute detail that a project becomes impossible it also is sometimes heard as a derisory comment on a written or verbal report that is filled with unnecessary detail insider jargon or pompous language as with many phrases of this type its origins are somewhat mysterious various sources point to will rogers mark twain and lewis carroll as the originators of the phrase however no direct attribution has been identified | |
how not to boil the ocean | for project managers and business leaders it is especially important to avoid boiling the ocean management can accomplish this by focusing on the most critical parts of a project they can make sure they have the right team and the right resources in place before starting a project they may break large projects into smaller units accomplishing steps rather than failing by bounds it s critical to focus on the core pillars of a project and not let it run out of control creating boundaries within the given resources can help to achieve this and stopping any efforts to expand the scope of the project is imperative having clear agendas a timetable and frequent discussions on the progress of a project can help ensure that it does not become impossible to achieve the stated goals criticism of boiling the ocean some business experts believe that the term boil the ocean should be retired or used only specifically as it does not adequately provide sage advice these critics believe that the phrase works for complicated problems whereby breaking down tasks and assigning them to those best suited is a smart move that saves time and resources however these critics also believe that the ocean should be boiled when approaching complex tasks this is so because most complex tasks within an organization have a link to all parts of the organization and working on a larger scale ensures that any changes or new implementations impact all parts of the organization equally and positively working in isolation could be fruitless furthermore complex problems can be so vast it can be difficult to know where to start and what awaits down the line as a project progresses therefore avoiding one area to focus on another might not be the best strategy here being all inclusive and expanding the breadth of the project may be the quickest and most successful way to achieve the intended goal examples of boiling the ocean say a manager directed a team to prepare a presentation for an american business client based in houston instead of requesting a straightforward presentation the manager may insist that the employees prepare versions in spanish french japanese chinese and italian as well as english just in case someone at the presentation prefers to hear it in one of those languages the manager has taken a simple project and turned it into something which is nearly impossible in fact the ocean is boiling another example might be a six month old startup company that has set a goal of obtaining venture capital funding and going public by the end of the year such a goal might seem laudably ambitious to the company s founder the employees who are tasked with getting it done know it s boiling the ocean | |
what does it mean to not boil the ocean | saying don t boil the ocean means don t take on more than can realistically be accomplished in a given time period or don t set yourself up to fail as a warning it plays on the idiom boiling the ocean | |
what is boilerplate | boilerplate language is standardized text that can be used repeatedly in similar documents without needing to make major changes to the original boilerplate language is used for efficiency and to increase standardization in the structure language and content of written or digital documents in contract law boilerplate language is used to ensure that all the necessary legal details are documented | |
how boilerplates work | boilerplate can be any text that is reused repeatedly without substantial changes to the original boilerplates are commonly used online and in written documents by a variety of entities including corporations legal firms and medical facilities users can make slight changes to the language or certain portions of the text to tailor a document for different uses for instance a media release contains boilerplate language at the bottom which is usually information about the company or product and may be updated for different situations before being disseminated to the public the term is also used by software writers to refer to coding that is created and reused over and over again in this case the it specialist only has to rework some of the code to fit into the current need without making major changes to the original structure boilerplate can be described as the standard text portion of a template it provides the user with a basic structure that can be altered to suit different needs history of boilerplatein the 19th century a boilerplate was a steel slab used as a template in the construction of steam boilers this term for standardization was adopted by editors to describe the often trite and unoriginal work that some writers submitted for publication 1the legal profession began using the term boilerplate as early as the mid 1950s when an article in the bedford gazette criticized boilerplate language as fine print designed to bury the unpleasant details of an agreement businesses today use boilerplate clauses in contracts purchase agreements and other formal documents boilerplate clauses are designed not only to save time but also to protect businesses from making errors or legal mistakes in documents the wording of these passages is generally not up for negotiation with customers who will often sign boilerplate documents without actually reading or understanding them this type of boilerplate written by a party with superior bargaining power and presented to a weaker party is often called an adhesion contract in the legal profession courts may set aside provisions of such contracts if they find them coercive or unfair boilerplate can be a disparaging term referring to a lack of originality or sincere effort in any activity boilerplate language in the modern worldin contemporary times the term boilerplate is applied to a wide variety of settings it can refer to any standardized method form or procedure in marketing and public relations boilerplate refers to blocks of language in marketing materials or press releases that rarely change they may be written to express a company s mission or otherwise cast it in a positive light and are commonly added to a variety of its publications press releases or web pages including the about us page on many websites advantages and disadvantages of boilerplateboilerplates are considered a time and money saver companies don t have to waste resources drafting up new documents or contracts they can simply update existing documents or templates to suit their current purpose similarly it professionals can make a few alterations to existing code to create new text and documents online boilerplates can help prevent mistakes the language is already vetted to ensure it is error free which means fewer headaches in the future this provides companies and individuals with protection from legal problems that can arise from sloppy work standard forms provide consistency they prevent inadvertent deviation from one contract or document to the next but there are disadvantages as well and they usually fall on the recipient rather than the producer in most cases people don t read the fine print and aren t aware of the conditions they must uphold contractual boilerplates often contain language that favors one party the writer in these cases companies rely on the fact that individuals will skip or skim through these sections boilerplates save time and money | |
what is a boiler room | a boiler room is a place or operation usually a call center where high pressure salespeople call lists of potential investors sucker lists to peddle speculative sometimes fraudulent securities sucker lists identify victims of previous scams understanding boiler roomthe term boiler room refers to an early practice of running such operations in the basement or boiler room of a building and is so called due to high pressure selling a broker using boiler room tactics gives customers only positive information about the stock and discourages them from doing any outside research boiler room salespeople typically use catchphrases like it s a sure thing or opportunities like this happen once in a lifetime boiler room methods if not illegal clearly violate the rules of fair practice set forth by the national association of securities dealers nasd the north american securities administrators association nasaa estimates that investors collectively lose billions of dollars a year to investment fraud 1 | |
how a boiler room operates | according to the securities and exchange commission sec the people involved in a boiler room scheme reach out to investors through cold calls which are unsolicited calls to people with whom the salesperson has had no prior contact this tactic positions the prospect to have no frame of reference or history from which to measure the caller s claims while this means the prospect has no reason to trust the caller it also means they have no background information to disprove their claims 2the sec advises investors to research the backgrounds of investment salespeople and verify their registered status at its website investor gov part of the pressure sales approach may include making assertions about the investment opportunity that the target cannot verify on their own the salesperson might insist on immediate payment by the prospect they may also take a hostile approach threatening the prospect to act promises of high returns and no risk might also be used to pressure prospects to invest boiler room tactics are sometimes used to convince investors to overspend on the purchase of securities that are actually of lower value the securities may in fact be worthless or nonexistent and the funds that are raised are solely for the enrichment of the individuals behind the operation a variety of fraudulent scams may be run through boiler room schemes this can include binary options fraud advance fee fraud and microcap fraud these schemes are no longer limited to basements and boiler rooms they can be maintained at a variety of locations such as offices or private homes boiler room salespeople may also solicit prospects through other means than phone calls electronic messaging such as email text messages and social media can be used to initiate contact with a prospect | |
how to spot and avoid boiler room scams | like other forms of confidence schemes boiler rooms take advantage of the subjects greed and emotions in order to get their money they often rely on high pressure sales tactics such as aggressive cold calling misinformation and extravagant promises to assure buyers that they are buying a sure thing they may also hint at insider information such as an upcoming merger or acquisition that would affect the share price the sec requires brokers to adhere to strict standards when selling securities brokers may not misinform or omit material facts when selling securities nor can they exaggerate their own track records they are also required to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer 3 if a broker is trying to reach potential buyers by cold calling they may not have the customer s needs in mind the sec strictly prohibits securities dealers from misinforming investors or making material omissions if a purported stockbroker claims to have access to secret inside information that is a classic sign of a scam examples of boiler roomspopularized in films like boiler room glengarry glen ross and the wolf of wall street boiler rooms have become synonymous with unethical sales tactics however the actual techniques have changed substantially here are some recent examples penny stocks are small companies that trade for less than 5 per share most penny stocks are too small for regular stock markets and are only traded over the counter this means that a comparatively small group of buyers can cause a significant rise in price in a typical penny stock scam operators would first accumulate a small cap stock at a low price and then use boiler room tactics to find buyers for an inflated price in such a scam victims may think that they are buying on the open market when they are effectively buying their shares directly from the operators not all boiler rooms sell securities in a 2015 case in the australian state of queensland police discovered a boiler room selling sports betting software according to abc the telemarketers were working from a carefully prepared script to collect millions of dollars from australian investors promising extravagant returns of up to 80 000 per year the scammers also used false names and fabricated testimonials while paying off local police to provide cover boiler room faqsa pump and dump is a form of illegal market manipulation in which scammers artificially raise the price of their own shares in order to sell them at a profit pump and dump scams are particularly popular with cryptocurrencies due to the lack of market depth and effective regulation in a typical pump and dump operators use cold calling message boards or social media to reach investors and persuade them to buy the security usually with promises of guaranteed profits as the price starts to rise the operators sell their own shares leaving buyers holding the bag passed in 1990 the penny stock reform act sought to reduce the occurrence of penny stock fraud such as the schemes outlined above the act included stringent disclosure requirements for brokers selling penny stocks in order to prevent them from misinforming buyers it also established an electronic marketplace for quoting such securities dial and smile refers to the telemarketing technique of cold calling potential buyers for sales purposes as the term implies these techniques rely on high pressure sales tactics and emotional manipulation to persuade people to buy things that they would not ordinarily want to combat aggressive cold calling government agencies have prohibited telemarketers from making false statements calling cell phones or violating the do not call list the bottom lineboiler room scams are as old as the stock market while they are no longer done in literal boiler rooms the technique is the same brokers use unethical tactics to market low quality securities without disclosing the hidden downsides while technology has changed boiler room tactics haven t while securities fraud isn t going anywhere there are now stricter regulations against boiler room tactics requiring brokers to disclose all material information and forbidding them from exaggerating the potential upsides | |
bollinger bands a popular tool among investors and traders helps gauge the volatility of stocks and other securities to determine if they are over or undervalued developed in the 1980s by financial analyst john bollinger the bands appear on stock charts as three lines that move with the price the center line is the stock price s 20 day simple moving average sma the upper and lower bands are set at a certain number of standard deviations usually two above and below the middle line | the bands widen when a stock s price becomes more volatile and contract when it is more stable many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band signaling an opportune time to trade 1while valuable bollinger bands are a secondary indicator that is best used to confirm other analysis methods below we guide you through how to interpret bollinger bands when the tool is best used and what other indicators are best matched with it image by sabrina jiang investopedia 2021who is john bollinger john bollinger cfa cmt has been a major influence in technical analysis and is best known for developing bollinger bands in the 1980s bollinger combined his background in mathematics and engineering with financial market analysis to create this tool which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices 2 the tool has since become a staple in technical analysis he is also the founder of bollinger capital management a money management company and has been a prominent commentator and analyst on market conditions 3investopedia joules garciaconstructing bollinger bandsthe three lines that make up bollinger bands are based on a security s price moves the center line is the intermediate term trend and is typically a 20 day sma of the closing prices the upper and lower bands are plotted a distance from the sma set by a certain number of standard deviations usually two above and below the center line 1to calculate the bands you first determine the number of periods used for both the sma and standard deviation and the number of standard deviations for the upper and lower bands should be from the center line while the settings can be adjusted based on your strategy most times you would use a 20 day sma and two standard deviations 4the upper band is found by adding two standard deviations to the center sma line while the lower band is calculated by subtracting two standard deviations from the center line the bands automatically widen when price volatility increases and narrow when volatility goes down you don t need to break out your calculator and graph paper many popular trading platforms like tradingview include this technical indicator as a standard feature thus you can easily overlay bollinger bands onto price charts you can also usually customize the bollinger bands settings increasing or lowering the periods and standard deviations to fit your needs given that the bands are plotted two standard deviations away from the sma they can indicate when prices are statistically high or low many traders consider the area near the upper band to be overbought territory the price is poised to fall and a potential resistance level where sellers may step in conversely the area near the lower band is often seen as oversold the price is poised to go up and a potential support level where buyers could enter the market | |
how to trade with bollinger bands | option traders and investors use bollinger bands to assess market volatility and identify potential entry and exit points the tool is premised on the idea that prices tend to remain within the bands upper and lower limits one use is for trend analysis the direction of the middle band can indicate a trend s strength when the middle band is heading upward this suggests an uptrend and the converse when heading downward in addition the width of the bands reflects market volatility narrow bands indicate less volatility which means a significant price move could be imminent this is known as a squeeze conversely wide bands indicate more volatility 5another way to use the tool is to figure out when an asset is overbought and oversold as the price touches or moves outside the upper band it could be overbought suggesting a potential selling or short opportunity similarly if the price touches or falls outside the lower band the asset may be oversold indicating a possible buying opportunity the bands can also help find price targets for instance after a price bounces off the lower band the upper band becomes a potential exit point if the price trend reverses likewise after a price move that touches the upper bands the lower band becomes a possible target if a reversal occurs another strategy is called the bollinger bounce this is based on the idea that prices tend to return to the middle band traders may buy or sell based on the rebound from the upper or lower bands toward the middle band especially in a ranging market 6below is a table of different ways the bollinger bands can move what they indicate and how traders often react we then go through these moves in more detail so you understand the strategies better using two standard deviations in constructing bollinger bands is based on the statistical properties of the normal distribution and the concept of volatility in this context standard deviation measures how far prices typically deviate from sma the middle band 2by setting the upper and lower bands two standard deviations away from the sma bollinger bands create a range expected to contain approximately 95 of the security s price movements over a given period this assumption is based on the statistical rule that about 95 of the data points will fall within two standard deviations of the mean for a normally distributed data set choosing two standard deviations provides a statistically significant measure of volatility while remaining practical for market analysis the bands can adapt to changes in volatility making them suitable for various market conditions | |
when prices move outside the upper or lower bands this suggests that the security is trading at a statistically high or low level relative to its recent price history this indicates potentially overbought or oversold conditions respectively however prices can remain outside the bands for extended periods during strong trends 1 | by examining the relationship between the price and the upper band you can look for overbought conditions check for potential price reversals or a slowdown in momentum find out when volatility is expanding set price targets based on mean reversion strategies and determine the strength of a trend 4 | |
when the price reaches or goes above the upper band this indicates increased volatility since bollinger bands adjusts to volatility a widening gap between the upper and lower bands means that the market is experiencing wider price fluctuations which could be due to economic and market news earnings reports and other market events | for investors using mean reversion strategies the upper band can act as a price target in a ranging market 7 if the price oscillates between the upper and lower bands without a clear trend hitting the upper band can signal to sell or go short because traders expect the price to move back toward the middle band or below in addition when there s a strong uptrend the price might repeatedly touch or stay above the upper band for extended periods this persistence above the upper band might indicate strong buyer enthusiasm and signal that the trend is likely to continue however traders and investors often look to confirm this with other indicators or techniques 8the upper band can also be the site for a breakout a price move that starts at the upper band and continues to push outside of it can signal one especially if there s been an increase in trading volume this indicates that the asset is starting a new trend or accelerating an existing one you could use this signal to trade in the direction of the breakout the lower band of the bollinger bands helps identify oversold conditions it is also a reference line for those using mean reversion strategies or looking for potential reversals if prices stay below this band this could mean the start of a new bearish trend especially if there s a lot of trading volume | |
when the price of an asset touches or falls below the lower band this could mean the asset is undervalued or that the selling pressure has gone too far potentially leading to a reversal or pause in the downward trend 1 | just as touching the upper band signals an increase in volatility the price reaching the lower band indicates greater volatility in the context of a downward move however when the bands narrow after a period of wide fluctuation there s decreased volatility which might mean a significant price move as the price consolidates 6for investors employing mean reversion strategies or looking for bounce back opportunities the lower band can be used as a target for buying prospects the rationale is that if the price has moved down to the lower band it might rebound toward the middle band or higher especially in a ranging market without a strong downtrend 5that said if the price stays below the lower band this signals a strong downtrend continual contact with the band or new lows below could indicate the bearish sentiment is strong and likely to continue however you should confirm this with other indicators to avoid false signals or traps 8a decisive move below the lower band can signify a breakdown or the start of a new bearish trend especially if the volume is high and there are other bearish signals since further declines could occur you can use this as a potential signal to sell or enter a short position | |
when the bands widen this signals an increase in volatility because the standard deviation of the price increases thus the price moves are more significant than in the recent past 1 | economic announcements earnings reports geopolitical events or sudden shifts in market sentiment can be behind these changes traders see increased volatility as an opportunity for substantial gains and a risk of greater losses 9the widening of the bands could signal the beginning of a substantial price trend as volatility increases the chance of a significant and sustained price move in one direction also increases however you should confirm this with other indicators or price patterns before proceeding | |
when the bands widen after a period of contraction during a squeeze many consider this a sign that a breakout is about to occur while the bands themselves do not indicate the direction of the breakout investors can assess the potential direction by comparing the price s movement to the bands and other indicators | the increased volatility signaled by widening bollinger bands might prompt investors to reassess their risk management strategies they might cut their positions or diversify their holdings to manage the higher risk associated with greater price fluctuations a contraction of the bands suggests that the market is experiencing less volatility price movements are more contained and there may be less trading volume or market interest in the short term this reduced volatility period can be seen as a time of consolidation 10while tightening bands indicate less volatility market analysts often consider this a precursor to major price moves or breakouts traders monitor squeezes closely since they suggest the market is building energy for a significant change the longer the squeeze the more potent the subsequent breakout is expected to be this is based on the principle that periods of low volatility are frequently followed by periods of high volatility however this doesn t mean you ll know where the breakout will head during a tightening period traders may adjust their risk management strategies such as pulling in stop loss orders to reflect lower volatility while preparing for a potential increase ahead the tightening of bollinger bands could also mean there s no consensus among market participants about the future direction of the price this indecision can result in the price oscillating within a tighter range until new information arrives or the market forces a breakout | |
how reliable are bollinger bands | the effectiveness of this tool depends on the asset involved the settings used and other factors 14 | |
what technical indicators are similar to bollinger bands | there are several including the keltner channels moving average envelopes the donchian channels the average true range and the standard deviation indicator 11 each tool offers a different view of the market s changes | |
what are some limitations to using bollinger bands | first bollinger bands are a lagging indicator which means they respond to rather than predict price changes potentially informing you of changes after they ve already happened in addition they can generate false signals during highly volatile market periods when the bands expand third the standard settings of bollinger bands 20 day simple moving average and two standard deviations might not be the best for all trading scenarios finally bollinger bands are often more effective when used with other indicators such as volume or momentum oscillators relying only on bollinger bands without further confirmation can lead to poor trading decisions | |
how can i avoid false signals from the bollinger bands | you should consider using them with other technical analysis tools to confirm trends and signals employing momentum oscillators like the rsi or macd can help identify whether the market is overbought or oversold as prices reach or break through the bands in addition volume indicators can tell you about the strength behind a move as significant price changes with a high volume could confirm signals from the bollinger bands you can also adjust the settings of the bollinger bands by increasing the period of the moving average or the number of standard deviations which might filter out less significant price moves the bottom linebollinger bands is a versatile technical analysis tool that can provide greater clarity about market volatility and price trends by framing price movements with upper and lower boundaries set at standard deviations around a central moving average the indicator adapts to volatility in real time offering a visual representation of how prices are moving relative to historical norms while it s valuable for highlighting potential reversals breakouts and trend strengths bollinger bands is usually more effective when used with other indicators and methods | |
what is the bombay stock exchange bse | the bombay stock exchange bse is the first and largest securities market in india and was established in 1875 as the native share and stock brokers association 1 based in mumbai india the bse lists over 5 300 companies and is one of the largest exchanges in the world along with the new york stock exchange nyse nasdaq london stock exchange group japan exchange group and shanghai stock exchange 2trading on the bombay stock exchange bse in 1995 the bse switched from an open floor to an electronic trading system 3 in 2024 electronic trading systems dominate the financial industry overall offering fewer errors faster execution and better efficiency than traditional open outcry trading systems securities that the bse lists include stocks stock futures stock options index futures index options and weekly options the bse has helped develop india s capital markets and provides clearing settlement and risk management the bse s overall performance is measured by the sensex a benchmark index of 30 of the bse s largest and most actively traded stocks covering a broad range of sectors debuting in 1986 the sensex is india s oldest stock index also called the bse 30 the index broadly represents the composition of india s entire market 45on jan 22 2024 india s stock market capitalization surpassed hong kong s for the first time making india the fourth largest equity market globally according to data compiled by bloomberg the combined value of shares reached 4 33 trillion on the exchanges in india beating the 4 29 trillion in hong kong 6 | |
what is a bond | a bond is a fixed income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time the entity repays individuals with interest in addition to the original face value of the bond bonds are used by companies municipalities states and sovereign governments to finance projects and operations owners of bonds are debtholders or creditors of the issuer bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower investopedia ellen lindner | |
how bonds work | bonds are debt instruments and represent loans made to the issuer bonds allow individual investors to assume the role of the lender governments and corporations commonly use bonds to borrow money to fund roads schools dams or other infrastructure 12 corporations often borrow to grow their business buy property and equipment undertake profitable projects for research and development or to hire employees 1bonds are fixed income securities and are one of the main asset classes for individual investors along with equities and cash equivalents the borrower issues a bond that includes the terms of the loan interest payments that will be made and the maturity date the bond principal must be paid back the interest payment is part of the return that bondholders earn for loaning their funds to the issuer 3 the interest rate that determines the payment is called the coupon rate 4the initial price of most bonds is typically set at par or 1 000 face value per individual bond the actual market price of a bond depends on the credit quality of the issuer the length of time until expiration and the coupon rate compared to the general interest rate environment the face value of the bond is what is paid to the lender once the bond matures 5markets allow lenders to sell their bonds to other investors or to buy bonds from other individuals long after the original issuing organization raised capital a bond investor does not have to hold a bond through to its maturity date characteristics of bondsbond categoriesthere are four primary categories of bonds sold in the markets however you may also see foreign bonds issued by global corporations and governments on some platforms bond prices and interest ratesa bond s price changes daily where supply and demand determine that observed price if an investor holds a bond to maturity they will get their principal back plus interest however a bondholder can sell their bonds in the open market where the price can fluctuate a bond s price varies inversely with interest rates when interest rates go up bond prices fall to have the effect of equalizing the interest rate on the bond with prevailing rates and vice versa 5the issuer of a fixed rate bond promises to pay a coupon based on the face value of the bond for a 1 000 par 10 annual coupon bond the issuer will pay the bondholder 100 each year 5 if prevailing market interest rates are also 10 at the time that this bond is issued an investor would be indifferent to investing in the corporate bond or the government bond since both would return 100 however if interest rates drop to 5 the investor can only receive 50 from the government bond but would still receive 100 from the corporate bond investors bid up to the price of the bond until it trades at a premium that equalizes the prevailing interest rate environment in this case the bond will trade at 2 000 so that the 100 coupon represents 5 likewise if interest rates soared to 15 then an investor could make 150 from the government bond and would not pay 1 000 to earn just 100 this bond would be sold until it reached a price that equalized the yields in this case to a price of 666 67 yield to maturity ytm the yield to maturity ytm is the total return anticipated on a bond if the bond is held until the end of its lifetime yield to maturity is considered a long term bond yield but is expressed as an annual rate ytm is the internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled 6 ytm evaluates the attractiveness of one bond relative to other bonds of different coupons and maturity in the market the formula for ytm involves solving for the interest rate investopediainvestors can measure the anticipated changes in bond prices given a change in interest rates with the duration of a bond duration represents the price change in a bond given a 1 change in interest rates 7 this practical definition is the modified duration of a bond bonds with long maturities and also bonds with low coupons have the greatest sensitivity to interest rate changes | |
how to invest in bonds | while there are some specialized bond brokers most online and discount brokers offer access to bond markets and investors can buy them like stocks treasury bonds and tips are typically sold directly via the federal government and can be purchased via its treasurydirect website investors can also buy bonds indirectly via fixed income etfs or mutual funds that invest in a portfolio of bonds investors can also take a look at investopedia s list of the best online stock brokers image by sabrina jiang investopedia 2020bond variationsthe bonds available for investors come in many different varieties depending on the rate or type of interest or coupon payment by being recalled by the issuer or because they have other attributes | |
what determines a bond s coupon rate | two features of a bond credit quality and time to maturity are the principal determinants of a bond s coupon rate if the issuer has a poor credit rating the risk of default is greater and these bonds pay more interest bonds that have a very long maturity date also usually pay a higher interest rate this higher compensation is because the bondholder is more exposed to interest rate and inflation risks for an extended period | |
how are bond s rated | credit ratings for a company and its bonds are generated by credit rating agencies like standard and poor s moody s and fitch ratings the very highest quality bonds are called investment grade and include debt issued by the u s government and very stable companies such as many utilities 1213 bonds that are not considered investment grade but are not in default are called high yield or junk bonds these bonds have a higher risk of default in the future and investors demand a higher coupon payment to compensate them for that risk 14 | |
what is duration | bonds and bond portfolios will rise or fall in value as interest rates change the sensitivity to changes in the interest rate environment is called duration the use of the term duration in this context can be confusing to new bond investors because it does not refer to the length of time the bond has before maturity instead duration describes how much a bond s price will rise or fall with a change in interest rates the bottom linebonds are issued by companies and governments to finance projects and fund operations a bond is considered a fixed income instrument since bonds traditionally pay a fixed interest rate to debtholders investors can purchase corporate bonds through financial institutions or online brokers or buy government bonds through the u s treasury website | |
what is a bond covenant | a bond covenant is a legally binding term of agreement between a bond issuer and a bondholder bond covenants are designed to protect the interests of both parties negative or restrictive covenants forbid the issuer from undertaking certain activities positive or affirmative covenants require the issuer to meet specific requirements understanding bond covenantscovenants are often put in place by lenders to protect themselves from borrowers defaulting on their obligations due to financial actions detrimental to themselves or the business all bond covenants are part of a bond s legal documentation and are part of corporate bonds and government bonds a bond s indenture is the portion that contains the covenants both positive and negative and is enforceable throughout the entire life of the bond until maturity possible bond covenants might include restrictions on the issuer s ability to take on additional debt requirements that the issuer provide audited financial statements to bondholders and limitations on the issuer s ability to make new capital investments | |
when an issuer violates a bond covenant it is considered to be in technical default a common penalty for violating a bond covenant is the downgrading of a bond s rating which could make it less attractive to investors and increase the issuer s borrowing costs | for example moody s one of the major credit rating agencies in the united states rates a bond s covenant quality on a scale of 1 to 5 with five being the worst this means that a bond with a covenant rating of five is an indication that covenants are being violated consistently the quality of bond covenants tracked by moody s weakened by 36 basis points to a record high of 4 47 in q4 2020 as a resurgent market amid the economic recovery allowed borrowers to refinance on terms much more friendly than what was available in the first half of 2020 1affirmative bond covenantsan affirmative or positive covenant is a clause in a bond that requires the issuer i e borrower to perform specific actions examples of affirmative covenants include requirements to maintain adequate levels of insurance requirements to furnish audited financial statements to the lender compliance with applicable laws and maintenance of proper accounting books and credit rating if applicable a violation of an affirmative covenant ordinarily results in outright default certain bond issues may contain clauses that provide a grace period to remedy the violation if not corrected creditors are entitled to announce default and demand immediate repayment of principal and any accrued interest negative bond covenantsnegative or restrictive bond covenants are put in place to make issuers refrain from certain actions that could result in the deterioration of their credit standing and ability to repay existing debt the most common forms of negative covenants are financial ratios that an issuing firm must maintain as of the date of the financial statements for instance a clause may demand the ratio of total debt to earnings not to exceed some maximum amount which ensures that a company does not burden itself with more debt than it can afford to service another common negative covenant is an interest coverage ratio which says that earnings before interest and taxes ebit must be greater in proportion to interest payments by a certain number of times the ratio puts a check on a borrower to make sure that he generates enough earnings to afford paying interest example of bond covenanton june 23 2016 hennepin county minnesota issued a bond to help finance a part of the ambulatory outpatient specialty center at the county s medical center fitch ratings gave the bond a aaa rating because the bond is backed by the county s full faith credit and unlimited taxing power additionally the rating agency gave the county s outstanding hennepin county regional railroad authority limited tax go bonds hcrra a aaa rating for the same reasons including the fact that the county can pay the debt using ad valorem taxes on all taxable property the hcrra bond debenture contained a covenant stipulating that hennepin county can levy taxes to fund the debt service at 105 annually the debenture also stipulated that the maximum tax rate provides strong coverage of the debt service of 21 5x mads | |
what is a bond discount | bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity this amount called its par value is often 1 000 the primary features of a bond are its coupon rate face value and market price an issuer makes coupon payments to its bondholders as compensation for the money loaned over a fixed period at maturity the principal loan amount is repaid to the investor this amount is equal to the par or face value of the bond most corporate bonds have a par value of 1 000 some bonds are sold at par at a premium or at a discount understanding bond discounta bond sold at par has its coupon rate equal to the prevailing interest rate in the economy an investor who purchases this bond has a return on investment that is determined by the periodic coupon payments a premium bond is one for which the market price of the bond is higher than the face value if the bond s stated interest rate is greater than those expected by the current bond market this bond will be an attractive option for investors a bond issued at a discount has its market price below the face value creating a capital appreciation upon maturity since the higher face value is paid when the bond matures the bond discount is the difference by which a bond s market price is lower than its face value for example a bond with a par value of 1 000 that is trading at 980 has a bond discount of 20 the bond discount is also used in reference to the bond discount rate which is the interest used to price bonds via present valuation calculations bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond to understand this concept remember that a bond sold at par has a coupon rate equal to the market interest rate when the interest rate increases past the coupon rate bondholders now hold a bond with lower interest payments these existing bonds reduce in value to reflect the fact that newer issues in the markets have more attractive rates if the bond s value falls below par investors are more likely to purchase it since they will be repaid the par value at maturity to calculate the bond discount the present value of the coupon payments and principal value must be determined examplefor example consider a bond with a par value of 1 000 set to mature in 3 years the bond has a coupon rate of 3 5 and interest rates in the market are a little higher at 5 since interest payments are made on a semi annual basis the total number of coupon payments is 3 years x 2 6 and the interest rate per period is 5 2 2 5 using this information the present value of the principal repayment at maturity is pvprincipal 1 000 1 0256 862 30now we need to calculate the present value of coupon payments the coupon rate per period is 3 5 2 1 75 each interest payment per period is 1 75 x 1 000 17 50 pvcoupon 17 50 1 025 17 50 1 0252 17 50 1 0253 17 50 1 0254 17 50 1 0255 17 50 1 0256 pvcoupon 17 07 16 66 16 25 15 85 15 47 15 09 96 39the sum of the present value of coupon payments and principal is the market price of the bond market price 862 30 96 39 958 69 since the market price is below the par value the bond is trading at a discount of 1 000 958 69 41 31 the bond discount rate is therefore 41 31 1 000 4 13 bonds trade at a discount to par value for a number of reasons bonds on the secondary market with fixed coupons will trade at discounts when market interest rates rise while the investor receives the same coupon the bond is discounted to match prevailing market yields discounts also occur when the bond supply exceeds demand when the bond s credit rating is lowered or when the perceived risk of default increases conversely falling interest rates or an improved credit rating may cause a bond to trade at a premium short term bonds are often issued at a bond discount especially if they are zero coupon bonds however bonds on the secondary market may trade at a bond discount which occurs when supply exceeds demand | |
what is the bond equivalent yield | in financial terms the bond equivalent yield bey is a metric that lets investors calculate the annual percentage yield for fixed come securities even if they are discounted short term plays that only pay out on a monthly quarterly or semi annual basis however by having bey figures at their fingertips investors can compare the performance of these investments with those of traditional fixed income securities that last a year or more and produce annual yields this empowers investors to make more informed choices when constructing their overall fixed income portfolios understanding bond equivalent yieldto truly understand how the bond equivalent yield formula works it s important to know the basics of bonds in general and to grasp how bonds differ from stocks companies looking to raise capital may either issue stocks equities or bonds fixed income equities which are distributed to investors in the form of common shares have the potential to earn higher returns than bonds but they also carry greater risk specifically if a company files for bankruptcy and subsequently liquidates its assets its bondholders are first in line to collect any cash only if there are assets left over do shareholders see any money but even if a company remains solvent its earnings may nonetheless fall short of expectations this could depress share prices and cause losses to stockholders but that same company is legally obligated to pay back its debt to bondholders regardless of how profitable it may or may not be not all bonds are the same most bonds pay investors annual or semi annual interest payments but some bonds referred to as zero coupon bonds do not pay interest at all instead they are issued at a deep discount to par and investors collect returns when the bond matures to compare the return on discounted fixed income securities with the returns on traditional bonds analysts rely on the bond equivalent yield formula a closer look at the bond equivalent yield formulathe bond equivalent yield formula is calculated by dividing the difference between the face value of the bond and the purchase price of the bond by the price of the bond that answer is then multiplied by 365 divided by d which represents the number of days left until the bond s maturity in other words the first part of the equation is the standard return formula used to calculate traditional bond yields while the second part of the formula annualizes the first part to determine the equivalent figure for discounted bonds although calculating the bond equivalent yield can be complicated most modern spreadsheets contain built in bey calculators that can simplify the process still confused consider the following example assume an investor buys a 1 000 zero coupon bond for 900 and expects to be paid par value in six months in this case the investor would pocket 100 to determine bey we take the bond s face value par and subtract the actual price paid for the bond we then divide 100 by 900 to obtain the return on investment which is 11 the second portion of the formula annualizes 11 by multiplying it by 365 divided by the number of days until the bond matures which is half of 365 the bond equivalent yield is thus 11 multiplied by two which comes out to 22 | |
what is a bond etf | bond exchange traded funds etfs are a type of exchange traded fund etf that exclusively invests in bonds these are similar to bond mutual funds because they hold a portfolio of bonds with different particular strategies from u s treasuries to high yields and holding period between long term and short term bond etfs are passively managed and trade similar to stock etfs on major stock exchanges this helps promote market stability by adding liquidity and transparency during times of stress investopedia yurle villegasunderstanding bond etfsbond etfs trade throughout the day on a centralized exchange unlike individual bonds which are sold over the counter by bond brokers the structure of traditional bonds makes it difficult for investors to find a bond with an attractive price bond etfs avoid this issue by trading on major indexes such as the new york stock exchange nyse as such they can provide investors with the opportunity to gain exposure to the bond market with the ease and transparency of stock trading bond etfs are also more liquid than individual bonds and mutual funds which trade at one price per day after the market closes and during times of distress investors can trade a bond portfolio even if the underlying bond market is not functioning well bond etfs pay out interest through a monthly dividend while any capital gains are paid out through an annual dividend for tax purposes these dividends are treated as either income or capital gains however the tax efficiency of bond etfs is not a big factor because capital gains do not play as big a part in bond returns as they do in stock returns in addition bond etfs are available on a global basis 12both bond mutual funds and bond etfs have similarities but the holdings within the funds and the fees charged to investors can vary u s bond etfs experienced a record breaking year in 2020 u s bond etfs generated 168 billion in 2020 in october 2019 global bond etf assets under management topped 1 trillion and as of june 2023 bond etfs are one of the fast growing categories in asset management at 206 trillion 34types of bond etfsvarious etfs exist for the various subsectors some examples include investors who are unsure of what type to invest in should consider total bond market etfs which invest in the entire u s bond market advantages and disadvantages of bond etfsbond etfs offer many of the same features of an individual bond including a regular coupon payment one of the most significant benefits of owning bonds is the chance to receive fixed payments on a regular schedule these payments traditionally happen every six months bond etfs in contrast hold assets with different maturity dates so at any given time some bonds in the portfolio may be due for a coupon payment for this reason bond etfs pay interest each month with the value of the coupon varying from month to month 5assets in the fund are continually changing and do not mature instead bonds are bought and sold as they expire or exit the target age range of the fund the challenge for the architect of a bond etf is to ensure that it closely tracks its respective index in a cost effective manner despite the lack of liquidity in the bond market most bonds are held until maturity so an active secondary market is typically not available for them this makes it difficult to ensure a bond etf encompasses enough liquid bonds to track an index this challenge is bigger for corporate bonds than for government bonds the suppliers of bond etfs get around the liquidity problem by using representative sampling which simply means tracking only a sufficient number of bonds to represent an index the bonds used in the representative sample tend to be the largest and most liquid in the index given the liquidity of government bonds tracking errors will be less of a problem with etfs that represent government bond indices bond etfs are a great option to gain exposure to the bond market but there are some glaring limitations for one thing an investor s initial investment is at greater risk in an etf than an individual bond since a bond etf never matures there isn t a guarantee the principal will be repaid in full furthermore when interest rates rise it tends to harm the price of the etf like an individual bond as the etf does not mature however it s difficult to mitigate interest rate risk 6bond etfs vs bond mutual funds vs bond laddersthe decision over whether to purchase a bond fund or a bond etf usually depends on the investment objective of the investor if you want active management bond mutual funds offer more choices if you plan to buy and sell frequently bond etfs are a good choice for the long term buy and hold investors bond mutual funds and bond etfs can meet your needs but it s best to do your research as to the holdings in each fund if transparency is important bond etfs allow you to see the holdings within the fund at any given moment however if you re concerned about not being able to sell your etf investment due to the lack of buyers in the market a bond fund might be a better choice since you ll be able to sell your holdings back to the fund issuer as with most investment decisions it s important to do your research speak with your broker or financial advisor the liquidity and transparency of an etf offer advantages over a passively held bond ladder bond etfs offer instant diversification and a constant duration which means an investor needs to make only one trade to get a fixed income portfolio up and running a bond ladder which requires buying individual bonds does not offer this luxury 7one disadvantage of bond etfs is that they charge an ongoing management fee while lower spreads on trading bond etfs help offset this somewhat the issue will still prevail with a buy and hold strategy over the longer term the initial trading spread advantage of bond etfs is eroded over time by the annual management fee the second disadvantage is that there is no flexibility to create something unique for a portfolio for example if an investor is looking for a high degree of income or no immediate income at all bond etfs may not be the appropriate product 8frequently asked questionsno etfs are pooled investments that invest in a range of securities investors can buy and sell etfs like shares of stock on exchanges and bond etfs will track the prices of the bond portfolio that it represents most investors should have some funds allocated to bonds bond etfs tend to be more liquid and cost effective than bond mutual funds and offer diversified bond holdings across a range of bond types from u s treasuries to junk bonds bond etfs pay dividends on a monthly basis based on the interest income earned on the bonds held in the fund s portfolio a ladder strategy uses bonds of different maturities to reduce interest rate risk this can be done with individual bonds but also with bond etfs of different duration | |
what is a bond fund | a bond fund is a mutual fund or an exchange traded fund etf that buys and sells debt instruments like government and corporate bonds the primary goal of a bond fund is to generate monthly income for investors for an investor a bond fund is an alternative to buying individual bonds the investor in a bond fund is buying shares in a fund that buys and sells many bonds typically a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity understanding bond fundsfor many investors a bond fund is a more efficient way of investing than buying individual bond securities unlike individual bond securities bond funds do not have a maturity date for the repayment of principal so the principal amount invested may fluctuate from time to time investors in bond funds receive monthly payments that reflect the mix of all the bonds in the fund which means that the interest income payment will vary monthly bonds are rated according to the degree of risk that their issuers will default on their debts an aaa or aa bond is issued by a company or government that is highly unlikely to default an f bond is on the edge types of bond fundsmost bond funds are comprised of a certain type of bond such as corporate or government bonds they also focus on a time to maturity such as short term intermediate term and long term 1investors can choose bond funds that buy only the highest quality and safest bonds such as u s government bonds or the bonds of blue chip companies high quality bonds pay lower interest than riskier bonds investors should note that u s government bonds are considered to be of the highest credit quality 2 bond funds that specialize in u s treasury securities including treasury inflation protected securities tips are the safest but offer the lowest potential return 3other funds invest in only riskier bonds high yield or junk bonds bond funds that invest in riskier bonds offer higher returns along with a higher risk of default by the bond issuer there are also bond funds that have a mix of the different types of bonds to create multi asset class options the types of bond funds available include us government bond funds municipal bond funds corporate bond funds mortgage backed securities mbs funds high yield bond funds emerging market bond funds and global bond funds mutual funds have been investing in bonds for many years some of the oldest balanced funds which include allocations to both stock and bonds date back to the late 1920s bond fund benefitsbond funds are an attractive option compared to buying individual bonds they provide greater portfolio diversification than an individual investor could manage independently by investing in a bond fund an investor need only pay the annual expense ratio that covers marketing administrative and professional management fees the alternative is to purchase multiple bonds separately and deal with the transaction costs associated with each since a fund usually invests in many bonds of varying maturities the impact of any single bond s performance is lessened another benefit of a bond mutual fund is that it provides access to professional portfolio managers who have the expertise to research and analyze the creditworthiness of bond issuers and market conditions before buying into or selling out of the fund for example a fund manager may replace bonds when the issuer s credit is downgraded or when the issuer calls or pays off the bond before its maturity date special considerationsbond funds can be sold at any time for their current market net asset value nav which may result in a capital gain or loss individual bonds can be harder to unload from a tax perspective some investors in higher tax brackets may find that they have a higher after tax yield from a tax free municipal bond fund investment rather than a taxable bond fund investment due to the inverse relationship between interest rates and bond prices a long term bond carries greater interest rate risk than a short term bond therefore the nav of bond funds with longer term maturities will be impacted greatly by changes in interest rates this in turn will affect how much interest income the fund can distribute to its participants monthly bond etfsbond etfs have been around for less time than bond mutual funds with ishares launching the first bond etf fund in 2002 4 most of these offerings seek to replicate various bond indices although a growing number of actively managed products are also available etfs often have lower fees than their mutual fund counterparts like stocks etfs trade throughout the day the prices for shares can fluctuate moment by moment and may vary quite a bit over the course of a day s trading 5bond etfs operate much like closed end funds in that they are purchased through a brokerage account rather than directly from a fund company | |
what types of bond etfs are there | there is a wide variety of bond etfs and bond mutual funds to choose from they include funds that invest in california municipal bonds u s or international government bonds investment grade corporate bonds and tax exempt bonds funds may invest in short term medium term or long term bonds | |
what are some large bond etfs | the three largest bond etfs at this writing are the ishares core u s aggregate bond etf agg the vanguard total bond market etf bnd and the vanguard total international bond etf bndx 6 | |
what are the best performing bond mutual funds | as of the end of the first quarter of 2024 the best performing bond mutual funds among the top 10 largest funds and their one year performance were | |
how bond futures work | a futures contract is an agreement entered into by two parties one party agrees to buy and the other agrees to sell an underlying asset at a predetermined price on a specified date on the futures contract s settlement date the seller must deliver the asset to the buyer a futures contract s underlying asset could be a commodity or a financial instrument such as a bond bond futures are contractual agreements where the asset to be delivered is a government or treasury bond a bond futures contract can be held until maturity and it can also be closed out before the maturity date if the party that established the position closes out before maturity the closing trade will result in a profit or a loss from the position depending on the value of the futures contract at the time bond futures are standardized by the futures exchanges and are considered among the most liquid financial products a liquid market means that there are plenty of buyers and sellers allowing for the free flow of trades without delays as such the bond futures contract is used for hedging speculating or arbitrage purposes as mentioned earlier the seller of the bond futures can choose which bond to deliver to the buyer counterparty the bonds that are typically delivered are called the cheapest to deliver ctd bonds which are delivered on the last delivery date of the month a ctd is the cheapest security that s allowed to satisfy the futures contract terms the use of ctds is common with trading treasury bond futures since any treasury bond can be used for delivery as long as it is within a specific maturity range with a specific coupon or interest rate futures traders typically close positions well before the chances of delivery in fact many futures brokers require that their customers offset positions or roll to later months well before the futures expiration many futures contracts require margin meaning a trader needs to deposit and maintain a specific amount in their brokerage account this amount is generally much smaller than the notional value of the futures contract and it must be deposited when a futures position is opened a broker requires an initial margin and a maintenance margin should the bond futures position decline sufficiently in value the broker might issue a margin call which is a demand for additional funds to be deposited futures margin differs from securities margin in futures trading margin is the amount that must be maintained in the account it does not fund your purchase and it does not create a leveraged position it is based on the underlying asset s price and is used as a bond to ensure both parties can meet their obligations at expiry the risk of trading bond futures is potentially unlimited for either the buyer or seller of the bond risks include the price of the underlying bond changing drastically between the exercise date and the initial agreement date also the leverage used in margin trading can exacerbate the losses in bond futures trading | |
where to buy bond futures | bond futures trade primarily on the chicago board of trade cbot which is part of the chicago mercantile exchange cme group contracts typically expire quarterly march june september and december examples of underlying assets for bond futures include many brokers offer bond futures such as charles schwab td ameritrade interactive brokers and tradestation managing a bond futures positioneach day before expiration the long buy and short sell positions in the traders accounts are marked to market mtm or adjusted to current rates when interest rates rise bond prices decline since existing fixed rate bonds are less attractive in a rising rate environment conversely if interest rates decrease bond prices increase as investors rush to buy existing fixed rate bonds with attractive rates for example assume a u s treasury bond futures contract is entered into on day one if interest rates increase on day two the value of the t bond will decrease the margin account of the long futures holder will be debited to reflect the loss at the same time the account of the short trader will be credited the profits from the price move conversely if interest rates fall instead bond prices will increase the long trader s account will be marked to a profit and the short account will be debited bond futures are overseen by the commodity futures trading commission cftc the role of the cftc includes ensuring that fair trading practices equality and consistency exist in the markets as well as preventing fraud bond conversion factorsthe bonds that can be delivered are standardized through a system of conversion factors calculated according to the rules of the exchange the conversion factor is used to equalize coupon and accrued interest differences of all delivery bonds the accrued interest is the interest accumulated and yet to be paid if a contract specifies that a bond has a notional coupon of 6 the conversion factor will be before the trading of a contract happens the exchange will announce the conversion factor for each bond for example a conversion factor of 0 8112 means that a bond is approximately valued at 81 of a 6 coupon security the price of bond futures can be calculated on the expiry date as the product of the conversion factor and the futures price of the bond is the forward price available in the futures market | |
what is a bond future | a bond future is a contract between two traders to buy and sell a bond at a specified price and date futures are used to speculate on a bond s future price | |
what is the future bond rate | future bonds rates change frequently on feb 20 2024 u s treasury bond futures yield was 4 46 | |
what are interest rate futures and bond futures | interest rate futures are contracts that have an underlying interest bearing asset bond futures are examples of interest rate futures the bottom linebond futures obligate the contract holder to either buy or sell a bond at a predetermined price on a specific date bond futures traders try to profit from price changes in the short term and usually do not hold the contracts until expiry to avoid being forced to accept delivery there are benefits and drawbacks to futures trading the consistently fluctuating market can increase profits significantly but it also puts traders at greater risk | |
what is a bond ladder | a bond ladder is a portfolio of fixed income securities in which each security has a significantly different maturity date the purpose of purchasing several smaller bonds with varying dates of maturity rather than one large bond with a single maturity date is to minimize interest rate risk increase liquidity and diversify credit risk understanding bond ladderin a bond ladder the bonds maturity dates are evenly spaced across several months or several years so that the proceeds are reinvested at regular intervals as the bonds mature the more liquidity an investor needs the closer together their bond maturities should be benefits of a bond ladderinvestors who purchase bonds usually buy them as a conservative way to produce income however investors looking for a higher yield without reducing the credit quality usually need to purchase a bond with a longer maturity doing so exposes the investor to three types of risk interest rate risk credit risk and liquidity risk | |
when interest rates rise the demand for lower interest paying bonds decreases this leaves the bond with less liquidity since bond buyers can find similar maturity bonds with higher interest payments the only way to get a more favorable price in this scenario is to wait for interest rates to go down which causes the bond to go back up in price | buying a large position in one bond could also leave the investor exposed to credit risk similar to owning only one stock in a portfolio a bond s price is dependent on the credit of the underlying company or institution if anything lowers the credit quality of the bonds the price is negatively impacted immediately for example puerto rico bonds were once very popular but when the province had financial issues the bond prices immediately plummeted using a bond ladder satisfies these issues since there are several bonds with a staggered maturity bonds are constantly maturing and being reinvested in the current interest rate environment if the investor needs liquidity selling the shorter maturity bonds offers the most favorable pricing since there are several different bond issues the credit risk is spread across the portfolio and properly diversified if one of the bonds has a downgrade in credit quality only a portion of the entire ladder is affected generally speaking you should aim to have at least 10 rungs in your bond ladder all things equal the more rungs in the ladder the higher the diversification liquidity and yield stability example of a bond ladderhere s an example of a simple bond ladder that retail investors can create in order to construct a 10 year treasury bond ladder an investor would simply buy the following 10 etfs in equal amounts bond ladder faqsno since callable bonds can be redeemed by the issuer before maturity they re not ideal when building a bond ladder in order to build an etf bond ladder an investor simply needs to put an equal amount of money in a number of different etfs all with a different defined maturity date for example to build a 10 year corporate bond ladder an investor could purchase the following etfs in equal amounts instead of building a bond ladder an investor can purchase an etf that holds a diversified portfolio of bonds of varying durations popular all duration etfs include the ishares core u s aggregate bond etf asg the vanguard total bond market etf bnd the vanguard total international bond etf bndx and the ishares tips bond etf | |
what is the bond market | the bond market is often referred to as the debt market fixed income market or credit market it is the collective name given to all trades and issues of debt securities governments issue bonds to raise capital to pay debts or fund infrastructural improvements publicly traded companies issue bonds to finance business expansion projects or maintain ongoing operations investopedia danie drankwalterhistory of the bond marketsloans that were assignable or transferrable to others appeared as early as ancient mesopotamia where debts denominated in units of grain weight could be exchanged among debtors the recorded history of debt instruments dates back to 2400 b c via a clay tablet discovered at nippur now present day iraq this artifact cites a guarantee for payment of grain and the consequences if the debt was not repaid 12in the middle ages governments issued sovereign debt to fund wars the bank of england the world s oldest central bank was established to raise money to rebuild the british navy in the 17th century through bonds 3 the first u s treasury bonds were issued to help fund the military first in the war of independence from the british crown and again in the form of liberty bonds to raise funds to fight world war i 45early chartered corporations such as the dutch east india company voc and the mississippi company issued debt instruments before they issued stocks 67 these bonds such as in the image above were guarantees or sureties and were hand written to the bondholder buying and trading bondsbonds are traded on the primary market and the secondary market the primary market is the new issues market and transactions occur directly between the bond issuers and the bond buyers this offering is known as the primary distribution the primary market holds brand new debt securities not previously offered to the public 8in the secondary market securities previously sold in the primary market are bought and sold 9 investors can purchase these bonds from a broker who acts as an intermediary between the buying and selling parties these secondary market issues may be packaged as pension funds mutual funds and life insurance policies types of bondscompanies issue corporate bonds to raise money for current operations expanding product lines or opening up new manufacturing facilities corporate bonds are commonly longer term debt instruments with a maturity of at least one year and are commonly categorized into two types based on the credit rating assigned to the bond and its issuer 1011investment grade signifies a high quality bond that presents a relatively low risk of default bond rating firms like standard poor s and moody s use different designations consisting of the upper and lower case letters a and b to identify a bond s credit quality rating 1213junk bonds or high yield bonds carry a higher risk junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting not paying their interest payments or repaying the principal to investors junk bonds are also called high yield bonds since the higher yield is needed to help offset any risk of default 14nationally issued government bonds or sovereign bonds entice buyers by paying out the face value listed on the bond certificate on the agreed maturity date with periodic interest payments this makes government bonds attractive to conservative investors and considered the least risky in the u s government bonds are known as treasuries and the most active and liquid bond market in august 2023 fitch ratings downgraded the long term ratings of the united states to aa from aaa based on the expected fiscal deterioration over the next three years a high and growing general government debt burden and the erosion of governance relative to aa and aaa peers over the last two decades with repeated debt limit standoffs and untimely resolutions 16municipal bonds or muni bonds are locally issued by states cities special purpose districts public utility districts school districts publicly owned airports and seaports and other government owned entities that seek to raise cash to fund various projects municipal bonds are commonly tax free at the federal level and can be tax exempt at state or local tax levels making them attractive to qualified tax conscious investors a general obligation bond go bond is issued by government entities not backed by revenue from a specific project some go bonds are backed by property taxes or payable from general funds a revenue bond secures principal and interest payments through sales fuel hotel occupancy or other taxes when a municipality is a conduit issuer of bonds a third party covers interest and principal payments 17mortgage backed security mbs issues consist of pooled mortgages on real estate properties the investor who buys a mortgage backed security is essentially lending money to homebuyers through their lenders these typically pay monthly interest 18the mbs is a type of asset backed security abs 19 during the subprime mortgage meltdown of 2007 2010 this type of security relied on failed mortgages to support it 20governments and companies in emerging market economies issue bonds that provide growth opportunities but with greater risk than domestic or developed bond markets in the 1980s u s treasury secretary nicholas brady began a program to help global economies restructure their debt via bond issues denominated in u s dollars many countries in latin america issued these brady bonds throughout the next two decades marking an upswing in the issuance of emerging market debt 21 bonds are issued in developing nations and by corporations in asia latin america eastern europe africa and the middle east 22investing in emerging market bonds includes the standard risks that accompany all debt issues such as the variables of the issuer s economic or financial performance and the ability of the issuer to meet payment obligations these risks can be heightened by the political and economic volatility in developing nations emerging market risks also include exchange rate fluctuations and currency devaluations 23bond indicesjust as the s p 500 and the russell indices track equities bond indices like the bloomberg aggregate bond index the merrill lynch domestic master and the citigroup u s broad investment grade bond index track and measure corporate bond portfolio performance the bloomberg u s aggregate bond index the agg is a market weighted benchmark index it provides investors with a standard against which they can evaluate a fund or security the index includes government and corporate bonds and investment grade corporate debt instruments with issues higher than 300 million and maturities of one year or more 24 the agg is a total return benchmark index for many bond funds and exchange traded funds etfs bond market vs stock marketbonds represent debt financing while stocks are equity financing bonds are a form of credit where the bond issuer must repay the bond owner s principal plus additional interest stocks do not entitle the shareholder to any return of capital because of their legal protections and guarantees bonds are typically less risky than stocks and command lower expected returns than stocks stocks are inherently riskier than bonds and have the potential for bigger gains or bigger losses both stock and bond markets tend to be very active and liquid bond prices tend to be sensitive to interest rate changes varying inversely to interest rate moves stock prices are sensitive to changes in future profitability and growth potential 2526investors without access to bond markets can still invest in bonds through bond focused mutual funds and etfs advantages and disadvantages of bondsfinancial experts commonly recommend a well diversified portfolio with some allocation to the bond market bonds can be less volatile than stocks with lower returns and carry credit and interest rate risk owning too many bonds is considered overly conservative over long time horizons 27less risky and less volatile than stocks wide range of issuers and bond types to choose from bondholders have preference over shareholders in the event of bankruptcy lower risk translates to lower return buying bonds in the primary market is less accessible for ordinary investors exposure to default risk and interest rate risk | |
what is the bond market and how does it work | the bond market is where various debt instruments are sold by corporations and governments bonds are issued to raise debt capital to fund operations or seek growth opportunities issuers promise to repay the original investment amount plus interest 26 | |
are bonds a good investment | like any investment the expected return of a bond must be weighed against its risk the riskier the issuer the higher the yield investors will demand junk bonds pay higher interest rates but are also at greater risk of default u s treasuries pay very low interest rates but have low risk 26can investors lose money in the bond market yes while not as risky as stocks bond prices fluctuate and can go down if interest rates rise the price of a highly rated bond will decrease the sensitivity of a bond s price to interest rate changes is known as its duration a bond will also lose significant value if its issuer defaults or goes bankrupt and it can no longer repay in full the initial investment nor the interest owed 28the bottom linethe bond market includes debt securities issued by governments and corporations both domestic and foreign bonds may also be structured with fixed or variable interest rates and may or may not be convertible into equity bonds are typically thought to be less volatile than stocks since they pay regular interest and return principal upon maturity | |
a bond quote provides the current price at which a bond is traded in the market it s essential for investors and traders to gauge the value of a bond in the marketplace bond quotes are typically provided as a percentage of the bond s face value the amount the bond will be worth at maturity understanding bond quotes helps investors compare different bonds and decide which bonds to buy or sell | for instance the bond s face value also known as its par value is generally set at 100 representing 100 of a bond s face value of 1 000 when a bond quote is given as 102 the bond is trading at 102 of its face value or 1 020 conversely a bond quote of 98 denotes the bond is trading at 98 of its face value or 980 such fluctuations in bond prices can occur because of various factors including changes in interest rates the bond s credit rating or broader market conditions by examining bond quotes investors can confirm the current market value of a bond which in turn helps to make a more informed decision whether to buy hold or sell investopedia yurle villegas | |
how to read a bond quote | reading a bond quote may initially seem complex but it s straightforward with a little guidance let s start with an example now let s take each part in order vz40 this is the bond s unique ticker symbol used to identify it 101 25 the price in a quote is usually listed as a percentage of its face value typically 1 000 but occasionally 100 as here this is converted to a numeric value and multiplied by 10 to determine the cost per bond bond quotes can also be expressed as fractions the number 101 25 means the bond is trading at 101 25 of its 100 face value so the actual dollar price is 101 25 3 892 the yield is the annual return on the bond expressed as a percentage the most common yield metric used is yield to maturity which estimates the bond s total return if held to maturity assuming all coupon and principal payments are made as scheduled 1 sometimes a or will be included in the yield indicating it is slightly above or below the stated yield 06 30 28 the maturity date is when the bond will be repaid in full knowing the maturity date is crucial for assessing the bond s life span and the duration of the investment this bond matures and the principal is due june 30 2028 5 the coupon rate is the annual interest rate paid on the bond it is fixed and determined at the time the bond is issued this bond pays interest or a coupon of 5 of its face value annually aa the bond has a credit rating of aa meaning it has a high credit quality but slightly higher risk than aaa bonds bonds are rated by credit rating agencies like moody s s p and fitch 2 the credit rating reflects the bond issuer s creditworthiness and the likelihood of default a higher rating e g aaa or aa indicates a lower risk while a lower rating e g bb or c suggests a higher risk in the us bonds are categorized into one of three groups taking the above information together the sample bond quoted is trading above its face value at 101 25 has a yield of 3 892 based on the market price matures halfway through the year 2028 pays a 5 annual coupon and has a strong credit rating an investor purchasing this bond at 101 25 can expect a yield of 3 892 each year until it matures the following details may also be found in bond quotes bond quotes can be obtained from various sources including financial news outlets brokerage firms or financial advisors online platforms and financial data services also provide updated bond quotes types of bond quotesface value quotesbonds are quoted as a percentage of their 1 000 or 100 face value 7 for example a quote of 95 means the bond is trading at 95 of its initial face value face value quotes allow you to easily calculate the bond s dollar price by multiplying the quote by the face value this is the most common method for quoting u s treasury bonds bonds are quoted by their annual yield to maturity based on their current market price 7 for example 5 25 yield yield quotations allow easier comparison of bonds based on their yields rather than dollar prices corporate and municipal bonds are typically quoted by yield 8many bonds especially corporate and municipal bonds are quoted electronically on platforms like the municipal securities rulemaking board s electronic municipal market access system or the financial industry regulatory authority s trace system some bonds such as certain corporate bonds are traded over the counter and these may not be as easily accessible for quotes as exchange traded bonds bonds may be quoted based on the yield spread over a benchmark security like u s treasurys e g 175 basis points over treasurys 7spreads provide an easier comparison of non treasury securities with the risk free government bond yield rates some bonds are simply quoted as a dollar price without reference to face value e g 1 254 pure price quotes are useful for bonds that don t have a standard 1 000 face value like some mortgage backed and asset backed securities the different quote types serve alternate purposes allowing comparisons based on face value yields spreads or dollar prices they provide alternate ways to assess the value of a bond | |
what is a bond | a bond is a debt security like an iou when you purchase a bond you are lending money to the issuer in exchange for periodic interest payments and the return of the bond s face value when it matures 8 | |
what is the difference between the bid and the ask price | a bid price is the most a buyer will pay an ask price is the least the seller will accept for the stock the difference is known as the spread bonds with high levels of liquidity such as treasurys generally have spreads of a few pennies between the bid and the ask price in a full quote the spreads on corporate bonds with lower levels of liquidity can exceed 1 a full quote on an illiquid corporate bond could list a last trade of 98 with a bid of 97 and an ask price of 99 5 | |
how do changes in interest rates affect bond quotes | changes in interest rates have an inverse relationship with bond prices when interest rates rise bond prices typically fall and vice versa these changes are reflected in bond quotes with the quoted price decreasing or increasing in response to interest rate moves | |
what is the significance of a bond being quoted at a premium vs a discount | a bond quoted at a premium is trading above its face value for example it could have a higher coupon rate than current market rates conversely a bond quoted at a discount is trading below its face value perhaps because it has lower coupon rates or the issuer s credit quality has fallen | |
are all bonds quoted in the same way | no bond quotes can differ across various types of bonds like corporate treasury and municipal bonds because of their different features and market behavior for instance treasury bonds are typically quoted in terms of yield only while corporate and municipal bonds may be quoted by either price or yield 7the bottom linea bond quote contains the vital information bond traders and investors need to evaluate and compare different bonds investors can make more informed decisions by understanding how to read and interpret bond quotes | |
what is a bond rating | a bond rating is a way to measure the creditworthiness of a bond which corresponds to the cost of borrowing for an issuer these ratings typically assign a letter grade to bonds that indicate their credit quality private independent rating services such as standard poor s moody s investors service and fitch ratings inc evaluate a bond issuer s financial strength or its ability to pay a bond s principal and interest in a timely fashion understanding bond ratingsmost bonds carry ratings provided by at least one of the following three chief independent rating agencies to determine a bond s rating these agencies conduct a thorough financial analysis of a bond s issuing body whether they are u s treasuries or bonds from international corporations based on each agency s individual set of criteria analysts determine the entity s ability to pay their bills and remain liquid while also taking into consideration a bond s future expectations and outlook the agencies then declare a bond s overall rating based on the collection of these data points pricing yield and a reflection of long term outlookbond ratings are vital to alerting investors to the quality and stability of the bond in question these ratings consequently greatly influence interest rates investment appetite and bond pricing higher rated bonds known as investment grade bonds are viewed as safer and more stable investments such offerings are tied to publicly traded corporations and government entities that boast positive outlooks investment grade bonds contain aaa to bbb ratings from standard and poor s and fitch and aaa to baa3 ratings from moody s investment grade bonds usually see bond yields increase as ratings decrease u s treasury bonds are the most common aaa rated bond securities 1non investment grade bonds junk bonds usually carry ratings of bb to d for standard and poor s and fitch and baa1 to c for moody s in some cases bonds of this nature are given not rated status although bonds carrying these ratings are deemed to be higher risk investments they nevertheless attract certain investors who are drawn to the high yields they offer some junk bonds are saddled with liquidity issues however and can feasibly default leaving investors with nothing 1in aug 2023 fitch ratings downgraded the long term ratings of the united states to aa from aaa due to the anticipated fiscal deterioration over the next three years increasing government debt burden and the erosion of governance related to aa and aaa rated peers over the last two decades that has resulted in repeat debt limit standoffs and 11th hour resolutions 2role of the rating agencies in the 2008 financial crisismany wall street watchers believe that the independent bond rating agencies played a pivotal role in contributing to the 2008 economic downturn in fact it came to light that during the lead up to the crisis rating agencies were bribed to provide falsely high bond ratings thereby inflating their worth one example of this fraudulent practice occurred in 2008 when moody s downgraded 83 of 869 billion in mortgage backed securities which were given a rating of aaa just the year before 3in short long term investors should carry the majority of their bond exposure in more reliable income producing bonds that carry investment grade bond ratings speculators and distressed investors who make a living off of high risk high reward opportunities should consider turning to non investment grade bonds | |
why do bonds with lower ratings have higher yields | bonds with lower ratings have a greater risk of default than bonds with higher ratings these bonds tend to have higher yields so as to still be able to entice investors despite bringing greater risk | |
what is a junk bond | bonds that are non investment grade are considered to be high yield or junk bonds they are considered to be high risk and usually have ratings of bb to d or not rated investors can profit through buying junk bonds but they also are at greater risk of losing their investment as these kinds of companies tend to have liquidity issues 1 | |
what is an investment grade bond | an investment grade bond is a so called high quality or low risk bond it is considered to be a fairly safe bet and has a very low rate of default bonds rated aaa aa a and bbb are considered investment grade 1the bottom linea bond rating is a grading given to a bond that indicates its creditworthiness bond ratings are assigned by agencies such as moody s standard poor s and fitch ratings and reflect an analysis of the bond issuer s financial strength or capacity to pay a bond s principal and interest the rating organizations assign grades to the bond such as aaa which indicates lower risk or b which indicates greater risk higher risk bonds offer higher yields while lower risk bonds offer lower yields 1 | |
bond rating agencies are companies that assess the creditworthiness of both debt securities and their issuers these agencies publish the ratings used by investment professionals to determine the likelihood that the debt will be repaid | understanding bond rating agenciesthe three primary bond rating agencies in the u s are standard poor s global ratings moody s and fitch ratings each uses a unique letter based rating system to quickly convey to investors whether a bond carries a low or high default risk and whether the issuer is financially stable standard poor s highest rating is aaa and a bond is no longer considered investment grade if it falls to bb status the lowest rating d indicates that the bond is in default that means the issuer is delinquent in making interest payments and principal repayments to its bondholders 1in general moody s assigns bond credit ratings of aaa aa a baa ba b caa ca c standard poor s and fitch assign bond credit ratings of aaa aa a bbb bb b ccc cc c and d with the latter denoting a bond issuer in default 231the agencies rate bonds at the time they are issued they periodically reevaluate bonds and their issuers to see if they should change the ratings bond ratings are important because they affect the interest rates that companies and government agencies pay on their issued bonds the top three bond rating agencies are private firms that rate corporate and municipal bonds based on the associated degree of risk they sell the ratings for publication in the financial press and daily newspapers other bond rating agencies in the united states include kroll bond rating agency kbra dun bradstreet corporation and egan jones ratings ejr company bond rating agency methodologiesto give credit ratings to organizations like governments businesses and financial instruments rating agencies utilize a variety of approaches the approaches and methodologies may include but are not limited to in addition to the methodologies above rating agencies may apply variations across each rating agency for example various credit ratings for the same company may vary across rating agencies due to the varying weights of these methodologies in addition rating agencies may have a variety of specialties and areas of interest some agencies may have areas of expertise in particular industries or classes of financial instruments which can cause differences in the breadth of industry research and the comprehension of risks unique to each sector rating agency regulatory frameworkrating agencies are subject to different regulatory frameworks at the top the securities and exchange commission sec is the principal regulatory body in charge of regulating rating agencies in the united states the sec has the authority to register regulate and oversee nationally recognized statistical rating organizations nrsros which are the rating agencies recognized by the sec as credible and influential in the u s market 56the u s congress approved the credit rating agency reform act crara in 2006 in reaction to the financial crisis of 2008 78the sec has established a code of conduct that nrsros must follow the code of conduct places a strong emphasis on the necessity for independence avoiding conflicts of interest and giving ratings that are fair and truthful additionally it requires that techniques rating results and any conflicts of interest be disclosed 5last in addition to local laws there may be international regulatory frameworks that apply to rating agencies for instance the international organization of securities commissions iosco has produced a code of conduct fundamentals for credit rating agencies that outlines international standards and principles for the operations of rating agencies 9last updated in 2021 a study by the federal reserve found that a data set of 2 000 credit ratings strongly indicated there was no influence by the rating agency s conflict of interest 10benefits of bond rating agenciesalthough bond rating agencies were heavily criticized early in the 21st century they continue to perform valuable functions for investors a variety of exchange traded funds etfs depend on bond ratings for their purchases for example an investment grade bond etf will buy or sell bonds depending on the ratings that they receive from the bond rating agencies in this way the agencies act similarly to fund managers charged with investing in securities of sufficient quality 11the bond rating agencies provide useful information to the markets however they are not responsible for the often irrational ways that investors and funds respond to that information even managed mutual funds frequently have rules that require them to sell bonds that fall below a specific credit rating a rating downgrade can cause a downward spiral of forced selling creating bargains for investors in fallen angel bonds criticism of bond rating agenciessince the 2008 credit crisis rating agencies have been criticized for not identifying all of the risks that could impact a security s creditworthiness in particular they were blamed for giving high credit ratings to mortgage backed securities mbs that turned out to be high risk investments 11investors continue to be concerned about possible conflicts of interest bond issuers pay the agencies for the service of providing ratings and no one wants to pay for a low rating because of these and other shortcomings ratings should not be the only factor investors rely on when assessing the risk of a particular bond investment on the other hand bond rating agencies have also been criticized for causing financial losses by making dubious rating downgrades most famously s p downgraded the u s federal government s credit rating from aaa to aa during the 2011 debt ceiling crisis 12in august 2023 fitch downgraded the u s government s rating from aaa to aa due to the expected fiscal deterioration over the next three years a high and growing general government debt burden and the erosion of governance relative to aa and aaa rated peers over the last two decades that has manifested in repeated debt limit standoffs and last minute resolutions 13in december of 2023 moody s also lowered its outlook on the u s credit rating to negative from stable citing looming fiscal deficits and rising debt service 14in point of fact the federal reserve can always print more money to pay interest furthermore the u s government showed no signs of defaulting during the following decade nonetheless stock prices experienced a significant correction in 2011 some innocent companies ended up paying higher interest on their debts however the market showed its lack of confidence in s p s downgrade by sending u s treasury bond prices higher 15the relatively discrete way in which the agencies rate bonds also generally makes market volatility unnecessarily high the most extreme case occurs when the agencies downgrade a nation s debt from investment grade to junk status a more continuous system would give markets more time to adjust | |
how do rating agencies assign credit ratings | rating agencies assign credit ratings based on their methodologies which consider factors like financial indicators industry analysis and macroeconomic conditions they analyze an entity s financial health industry risks and broader economic factors to determine the likelihood of default or creditworthiness the ratings typically range from aaa highest to d default 1 | |
how transparent are rating agencies in their methodologies | rating agencies vary in their transparency regarding methodologies while they disclose some aspects of their processes they may not provide full details due to proprietary concerns some agencies offer more transparency by providing information about their methodologies assumptions and rating rationales while others may provide relatively less information which can impact understanding and scrutiny 4 | |
how do rating agencies impact investments and borrowing costs | credit ratings play a significant role in investment decisions and borrowing costs highly rated entities benefit from lower borrowing costs as investors perceive them as less risky a downgrade or upgrade in a credit rating can impact an entity s ability to access capital markets and affect the pricing of bonds loans and other financial instruments | |
how do rating agencies assess non financial sectors such as governments | rating agencies assess non financial sectors including governments by analyzing factors specific to those sectors for governments they consider fiscal discipline economic growth prospects debt levels political stability and institutional strength be mindful that each rating agency has its own methodology and criteria to evaluate the creditworthiness of governments and other non financial sectors the bottom linerating agencies in the united states regulated by the securities and exchange commission sec assess the creditworthiness of entities and assign credit ratings they consider financial indicators industry analysis and macroeconomic factors in their methodologies the major rating agencies in the u s include standard poor s s p moody s and fitch ratings while they follow similar principles there are differences in their methodologies rating scales and expertise 16 | |
what is bond valuation | bond valuation is a technique for determining the theoretical fair value of a particular bond bond valuation includes calculating the present value of a bond s future interest payments also known as its cash flow and the bond s value upon maturity also known as its face value or par value because a bond s par value and interest payments are fixed an investor uses bond valuation to determine what rate of return is required for a bond investment to be worthwhile understanding bond valuationa bond is a debt instrument that provides a steady income stream to the investor in the form of coupon payments at the maturity date the full face value of the bond is repaid to the bondholder the characteristics of a regular bond include bond valuation in practicesince bonds are an essential part of the capital markets investors and analysts seek to understand how the different features of a bond interact in order to determine its intrinsic value like a stock the value of a bond determines whether it is a suitable investment for a portfolio and hence is an integral step in bond investing bond valuation in effect is calculating the present value of a bond s expected future coupon payments the theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate the discount rate used is the yield to maturity which is the rate of return that an investor will get if they reinvested every coupon payment from the bond at a fixed interest rate until the bond matures it takes into account the price of a bond par value coupon rate and time to maturity the size of the u s municipal bond market or the total amount of debt outstanding at the end of 2018 according to the securities industry and financial markets association sifma an industry group 2coupon bond valuationcalculating the value of a coupon bond factors in the annual or semi annual coupon payment and the par value of the bond the present value of expected cash flows is added to the present value of the face value of the bond as seen in the following formula v coupons c 1 r t v face value f 1 r t where c future cash flows that is coupon payments r discount rate that is yield to maturity f face value of the bond t number of periods t time to maturity begin aligned v text coupons sum frac c 1 r t v text face value frac f 1 r t textbf where c text future cash flows that is coupon payments r text discount rate that is yield to maturity f text face value of the bond t text number of periods t text time to maturity end aligned vcoupons 1 r tc vface value 1 r tf where c future cash flows that is coupon paymentsr discount rate that is yield to maturityf face value of the bondt number of periodst time to maturity for example let s find the value of a corporate bond with an annual interest rate of 5 making semi annual interest payments for 2 years after which the bond matures and the principal must be repaid assume a ytm of 3 therefore the value of the bond is 1 038 54 zero coupon bond valuationa zero coupon bond makes no annual or semi annual coupon payments for the duration of the bond instead it is sold at a deep discount to par when issued the difference between the purchase price and par value is the investor s interest earned on the bond to calculate the value of a zero coupon bond we only need to find the present value of the face value carrying over from the example above the value of a zero coupon bond with a face value of 1 000 ytm of 3 and 2 years to maturity would be 1 000 1 03 2 or 942 59 | |
are bonds valued the same as stocks | not exactly both stocks and bonds are generally valued using discounted cash flow analysis which takes the net present value of future cash flows that are owed by a security unlike stocks bonds are composed of an interest coupon component and a principal component that is returned when the bond matures bond valuation takes the present value of each component and adds them together | |
why is the price of my bond different from its face value | a bond s face or par value will often differ from its market value this has to do with several factors including changes to interest rates a company s credit rating time to maturity whether there are any call provisions or other embedded options and if the bond is secured or unsecured a bond will always mature at its face value when the principal originally loaned is returned | |
why are bond prices inversely related to interest rates | a bond that pays a fixed coupon will see its price vary inversely with interest rates this is because receiving a fixed interest rate of say 5 is not very attractive if prevailing interest rates are 6 and become even less desirable if rates can earn 7 in order for that bond paying 5 to become equivalent to a new bond paying 7 it must trade at a discounted price likewise if interest rates drop to 4 or 3 that 5 coupon becomes quite attractive and so that bond will trade at a premium to newly issued bonds that offer a lower coupon | |
what is duration and how does that affect bond valuation | bond valuation looks at discounted cash flows at their net present value if held to maturity duration instead measures a bond s price sensitivity to a 1 change in interest rates longer term bonds have a higher duration all else equal longer term bonds will also have a larger number of future cash flows to discount and so a change to the discount rate will have a greater impact on the npv of longer maturity bonds as well | |
how are convertible bonds valued | a convertible bond is a debt instrument that has an embedded option that allows investors to convert the bonds into shares of the company s common stock convertible bond valuations take a multitude of factors into account including the variance in underlying stock price the conversion ratio and interest rates that could affect the stocks that such bonds might eventually become at its most basic the convertible is priced as the sum of the straight bond and the value of the embedded option to convert | |
what is a bond yield | a bond yield is the return an investor realizes on a bond put simply a bond yield is the return on the capital invested by an investor bond yields are different from bond prices both of which share an inverse relationship the yield matches the bond s coupon rate when the bond is issued bond yields can be derived in different ways including the coupon yield and current yield additional calculations of a bond s yield include yield to maturity ytm among others investopedia daniel fishelunderstanding bond yieldsbonds are essentially a loan to bond issuers they are considered safe investments that s because bond values don t change the same way stock prices do they offer investors a reliable stream of income and provide bondholders with a fixed form of income investors earn interest on a bond throughout the life of the asset and receive the face value of the bond upon maturity investors can purchase bonds for more than their face value at a premium or less than the face value at a discount whichever they buy will change the yield they earn on the bond bonds are rated by services approved by the securities and exchange commission sec and ratings range from aaa as investment grade with the lowest risk to d which are bonds in default or junk bonds with the highest risk 1the return realized by a bond investor is called the yield there are a couple of different yield related concepts these include the formula and calculation of a bond yieldthe simplest way to calculate a bond yield is to divide its coupon payment by the face value of the bond this is called the coupon rate 2coupon rate annual coupon payment bond face value text coupon rate frac text annual coupon payment text bond face value coupon rate bond face valueannual coupon payment if a bond has a face value of 1 000 and made interest or coupon payments of 100 per year then its coupon rate is 10 or 100 1 000 bonds are essentially a loan to bond issuers they are considered safe investments that s because bond values don t change the same way stock prices do they offer investors a reliable stream of income and provide bondholders with a fixed form of income bond yield vs bond priceprice and yield are inversely related this means that as the price of a bond goes up its yield goes down conversely as the yield goes up the price of the bond goes down if an investor purchases a bond with a face value of 1000 that matures in five years with a 10 annual coupon rate the bond pays 10 or 100 in interest annually if interest rates rise above 10 the bond s price will fall if the investor decides to sell it 3if the interest rate for similar investments rises to 12 the original bond will still earn a coupon payment of 100 which would be unattractive to investors who can buy bonds that pay 120 as interest rates have risen to sell the original 1000 bond the price can be lowered so that the coupon payments and maturity value equal a yield of 12 if interest rates fall the bond s price would rise because its coupon payment is more attractive the further rates fall the higher the bond s price will rise in either scenario the coupon rate no longer has any meaning for a new investor but if the annual coupon payment is divided by the bond s price the investor can calculate the current yield and get an estimate of the bond s true yield current yield annual coupon payment bond price text current yield frac text annual coupon payment text bond price current yield bond priceannual coupon payment the current yield and the coupon rate are incomplete calculations for a bond s yield because they do not account for the time value of money maturity value or payment frequency and more complex calculations are required additional bond yield calculationsas noted above there are additional calculations of a bond s yield these include the ytm bond equivalent yield bey and effective annual yield eay a bond s yield to maturity is equal to the interest rate which makes the present value of all a bond s future cash flows equal to its current price these cash flows include all the coupon payments and maturity value solving for ytm is a trial and error process that can be done on a financial calculator but the formula is as follows price t 1 t cash flows t 1 ytm t where ytm yield to maturity begin aligned text price sum t t 1 frac text cash flows t 1 text ytm t textbf where text ytm text yield to maturity end aligned price t 1 t 1 ytm tcash flowst where ytm yield to maturity in the previous example a bond with a 1 000 face value five years to maturity and 100 annual coupon payments is worth 927 90 to match a new ytm of 12 the five coupon payments plus the 1 000 maturity value are the bond s six cash flows finding the present value of each of those six cash flows with an interest rate of 12 will determine what the bond s current price should be bond yields are quoted as a bond equivalent yield which adjusts for the bond coupon paid in two semi annual payments in the previous example the bonds cash flows were annual so the ytm is equal to the bey however if the coupon payments were made every six months the semi annual ytm would be 5 979 the bey is a simple annualized version of the semi annual ytm and is calculated by multiplying the ytm by two in this example the bey of a bond that pays semi annual coupon payments of 50 would be 11 958 5 979 x 2 11 958 the bey does not account for the time value of money for the adjustment from a semi annual ytm to an annual rate investors can define a more precise annual yield given the bey for a bond when considering the time value of money in the calculation in the case of a semi annual coupon payment the effective annual yield would be calculated as follows eay 1 ytm 2 2 1 where eay effective annual yield begin aligned text eay left 1 frac text ytm 2 right 2 1 textbf where text eay text effective annual yield end aligned eay 1 2ytm 2 1where eay effective annual yield if an investor knows that the semi annual ytm was 5 979 they could use the previous formula to find the eay of 12 32 because the extra compounding period is included the eay will be higher than the bey a bond rating is a grade given to a bond and indicates its credit quality the rating takes into consideration a bond issuer s financial strength or its ability to pay a bond s principal and interest in a timely fashion there are three bond rating agencies in the united states that account for approximately 95 of all bond ratings and include fitch ratings standard poor s global ratings and moody s investors service 4bond yield calculation issuessome factors skew the calculations in determining a bond s yield in the previous examples it was assumed that the bond had exactly five years left to maturity when it was sold which is rare the fractional periods can be defined but the accrued interest is more difficult to calculate assume a bond has four years and eight months to maturity the exponent in the yield calculations can be turned into a decimal to adjust for the partial year however this means that four months in the current coupon period have elapsed with two remaining which requires an adjustment for accrued interest a new bond buyer will be paid the full coupon so the bond s price will be inflated slightly to compensate the seller for the four months in the current coupon period that have elapsed bonds can be quoted with a clean price that excludes the accrued interest or a dirty price that includes the amount owed to reconcile the accrued interest when bonds are quoted in a system like a bloomberg or reuters terminal the clean price is used | |
what does a bond s yield tell investors | a bond s yield is the return to an investor from the bond s interest or coupon payments it can be calculated as a simple coupon yield or using a more complex method like yield to maturity higher yields mean that bond investors are owed larger interest payments but may also be a sign of greater risk the riskier a borrower is the more yield investors demand higher yields are often common with a longer maturity bond | |
are high yield bonds better investments than low yield bonds | bond investment depends on an investor s circumstances goals and risk tolerance low yield bonds may be better for investors who want a virtually risk free asset or one who is hedging a mixed portfolio by keeping a portion of it in a low risk asset high yield bonds may be better suited for investors who are willing to accept a degree of risk in return for a higher return | |
how do investors utilize bond yields | yields are used for more sophisticated analyses bonds of different maturities can be traded to take advantage of the yield curve which plots the interest rates of bonds having equal credit quality but differing maturity dates the slope of the yield curve gives an idea of future interest rate changes and economic activity they may also look at the difference in interest rates between different categories of bonds holding some characteristics constant a yield spread is a difference between yields on differing debt instruments of varying maturities credit ratings issuer or risk level calculated by deducting the yield of one instrument from the other such as the spread between aaa corporate bonds and u s treasuries this difference is most often expressed in basis points bps or percentage points the bottom linebond yield is the amount of return an investor will realize on a bond the coupon rate and current yield are basic yield concepts and calculations a bond rating is a grade given to a bond and indicates its credit quality and often the level of risk to the investor in purchasing the bond | |
what is a bondholder | a bondholder is an entity that invests in or owns bonds bondholders hold debt securities that are typically issued by corporations and governments they essentially lend money to bond issuers by giving them capital in return bond investors receive their principal or initial investment back when the bonds mature for most bonds bondholders also receives periodic interest payments 1understanding bondholdersas noted above an entity that invests in bonds is known as a bondholder these investors purchase bonds directly from the entity that issues these fixed income assets bonds are usually issued by different levels of government including federal and local as well as corporations for instance prospective bondholders can purchase treasury bonds directly from the u s treasury during new issue auctions bonds are sold whenever the issuing entity wants to raise money for an express purpose for example governments may issue bonds to fund social programs or infrastructure projects or corporations may decide to sell bonds to further their own growth bondholders buy bonds from the issuer with upfront capital in exchange for their money bondholders are promised the return of their principal investment when the bond matures some bond issuers also promise to pay periodic interest or coupon payments that are paid either before or upon maturity bonds are typically considered safer investments than stocks because bondholders have a higher claim on the issuing company s assets in the event of bankruptcy in other words if the company must sell or liquidate its assets any proceeds will go to bondholders before common stockholders 1bonds are only as safe as the underlying issuer bonds carry credit risk and default risk since they re tied to the issuer s financial viability if a company struggles financially investors are at risk of default on the bond in other words the bondholder might lose 100 of the principal invested should the underlying company file bankruptcy 1bondholder specifics | |
when investing in bonds there are several vital areas that the bondholder must understand before investing unlike stocks bonds do not offer ownership participation in a company through a return of profits or voting rights instead they represent the issuer s loan obligations and the likelihood of repayment and other factors influence their pricing 1 | the coupon rate is the rate of interest that the company or government will pay the bondholder 2 the interest rate can be either fixed or floating a floating rate might be tied to a benchmark such as the yield of the 10 year treasury bond 3some bonds don t pay interest to investors instead they sell at a lower price than their face value or at a discount a zero coupon bond for example doesn t pay coupon interest but trades at a deep discount to the face value rendering its profit at maturity when the bond returns its full face value 4 for example a 1 000 discounted bond might sell in the market for 950 and upon maturity the investor receives the 1 000 face value for a 50 profit the date of maturity is when the company must pay back the principal initial investment to bondholders most government securities pay back the principal at maturity however the corporations that issue bonds have a few options for how they can repay the most common form of repayment is called a redemption out of capital here the issuing company makes a lump sum payment on the date of maturity 5 a second option is called a debenture redemption reserve with this method the issuing company returns specific amounts each year until the debenture is repaid on the date of maturity 6some bonds are callable securities a callable bond also known as a redeemable bond is one that the issuer may redeem at a date before the stated maturity if called the issuer will return the investor s principal early ending all future coupon payments 7the issuer s credit rating and ultimately the bond s credit rating impacts the interest rate that investors will receive credit rating agencies measure the creditworthiness of corporate and government bonds to provide investors with an overview of the risks involved in investing in that particular bond as opposed to investing in similar products credit rating agencies typically assign letter grades to indicate these ratings standard poor s for instance has a credit rating scale ranging from excellent at aaa to c and d for securities that carry higher credit risk a debt instrument with a rating below bb is considered to be a speculative grade or a junk bond which means the bond s issuer is more likely to default on loans 8in august 2023 fitch downgraded the long term ratings for the united states the rating dropped from aaa to aa fitch stated the move was due to the increasing national debt and the potential for fiscal deterioration over the next three years 9bondholders earn incomebondholders earn income in two primary ways first most bonds return regular interest coupon rate payments that are usually paid semi annually however depending on the structure of the bond it may pay yearly quarterly or even monthly coupons for example if a bond pays a 4 interest rate called a coupon rate and has a 1 000 face value the investor will be paid 40 per year or 20 semiannually until maturity the bondholder receives their full principal back at bond maturity 1 000 x 0 04 40 2 20 the second way a bondholder can earn income from the holding is by selling the bond on the secondary market if a bondholder sells the bond before maturity there s the potential for a gain on the sale like other securities bonds can increase in value but several factors come into play with bond appreciation for example let s say an investor paid 1 000 for a bond with a 1 000 face value if the bondholder sells the bond before maturity in the secondary market and the bond may fetch 1 050 thereby earning 50 on the sale of course the bondholder could lose if the bond decreases in value from the original purchase price 2besides the upsides of regular passive income and the return of investment at maturity one big advantage of being a bondholder is the income from certain bonds may be exempt from income taxes municipal bonds those issued by local or state governments often pay interest that is not subject to taxation 10 however to purchase a triple tax free bond that is exempt from state local and federal taxes you typically must live in the municipality in which the bond is issued 11rewards and risks for bondholdersthe rewards available to bondholders include a relatively safe investment product they receive regular interest payments and a return of their invested principal on maturity also in some cases the interest is not subject to taxes being a bondholder is generally perceived as a low risk endeavor when compared to other types of investments such as stocks that s because bonds which are fixed income investments guarantee consistent interest payments and the return of principal at maturity in the case of corporate bankruptcies bondholders are commonly among the first to be reimbursed common stockholders on the other hand are on the lower rungs of the repayment ladder although there are certain tax implications associated with certain bonds there are some bond categories that provide holders with tax free interest payments this means the investor doesn t have to declare the interest as income and can net the entire amount as profit 2the interest rate paid on a bond might not keep up with inflation inflationary risk is a measure of price increases throughout an economy if prices rise by 3 and the bond pays a 2 coupon the bondholder has a net loss in real terms in other words bondholders are susceptible to inflation risk bondholders also must deal with interest rate risk interest rate risk occurs when interest rates are rising most bonds have fixed rate coupons and as market rates rise they may end up paying lower rates as a result a bondholder might earn a lower yield compared to the market in the rising rate environment for example corporate bonds generally yield higher returns than holding government bonds but they come with higher risks this yield difference is because it is less likely a government or municipality will file for bankruptcy and leave its bondholders unpaid of course bonds issued by foreign countries with shakier economies or governments during upheaval can still carry a far greater risk of default than those issued by financially stable governments and corporations bond investors must consider the risk versus reward of being a bondholder risk causes bond prices on the secondary market to fluctuate and deviate from the bond s face value potential bondholders may not be willing to pay 1 000 for a bond with a 1 000 face value if it s issued by a new company with little earnings history or by a foreign government with an uncertain future as a result the 1 000 bond may only sell for 800 or at a discount however the investor who purchases the bond is taking the risk that the issuer will not fold or default before the investment s maturity in return the bondholder has the potential of a 20 gain at maturity 12bondholders can earn a fixed income with regular interest or coupon paymentssafe risk free investment with u s treasury optionsbondholders receive payment in a corporate bankruptcy before common stock shareholderssome municipal bonds provide tax free interest paymentsinterest rate risk when market rates are risingcredit and default risk can happen to corporate bonds tied to the issuer s financial viabilityinflationary risk if inflation outpaces the bond s coupon ratea bond s face value on the secondary market may decrease when market interest rates outpace the coupon rateexamples of bondholderspotential bondholders can invest in government bonds or corporate bonds below is an example of each with the benefits and risks a u s treasury bond t bond is issued by the u s government to raise money to finance projects or day to day operations the u s treasury department issues bonds via auctions at various times throughout the year while existing bonds trade in the secondary market considered risk free with the full faith and credit of the u s government backing them t bonds are a favorite investment for conservative investors however the risk free feature has a drawback as t bonds usually pay a lower interest rate than corporate bonds 13treasury bonds are long term bonds maturities between 10 to 30 years providing semiannual interest payments and face values of 1 000 for instance the 30 year treasury bond yield closed at 2 817 on march 31 2019 so the bondholder receives 2 817 yearly at maturity in 30 years they receive the fully invested principal back t bonds can sell on the secondary market before maturity 14microsoft msft has a series of corporate bonds or notes that it issues to raise capital many of them are long term fixed income assets that mature within 30 years issued on dec 6 2013 its maturity date is dec 15 2013 and trades on the secondary market on aug 17 2023 the bond s yield was 5 0142 which means the bondholder gets 5 0142 on an annual basis 15 | |
what rights do bondholders have | there are two inherent rights associated with being a bondholder the first is to be repaid the full principal amount once the bond matures the second is for the bond issuer to pay the bondholder interest at the agreed upon interval whether that s annually quarterly or another period 2 | |
what s the difference between a government and corporate bond | government bonds are issued by different forms of government including federal and local governments corporate bonds on the other hand are issued by companies usually those that are more established government bonds tend to be considered safer because they are backed by the full faith of the issuing entity such as those offered by the u s government corporate bonds on the other hand are often deemed a little riskier although bondholders are ahead of common stockholders when it comes to being paid bonds can lose their value if the issuing company goes bankrupt this means there s no guarantee how much bondholders will receive 1can i lose money on a bond yes there are instances when you can lose money on a bond bonds are generally considered safe investments but they are susceptible to certain risks for instance inflation can eat away at the returns of a bondholder if inflation is running higher than what the bond pays then you ll lose out you can also lose money on a bond because of any taxes you may owe on the interest you earn 12the bottom linebonds are fixed income investments that are generally considered safe investors who hold bonds are called bondholders make sure you know the ins and outs of being a bondholder notably things like the interest rate maturity date and credit ratings of bond issuers if you re reviewing an investment in government or corporate bonds there are certain factors you should consider although they are usually safer than stocks bonds do come with certain risks including inflation and interest rate risk 1 | |
what is a bonus | a bonus is a financial compensation that is above and beyond the normal payment expectations of its recipient companies may award bonuses to both entry level employees and to senior level executives while bonuses are traditionally given to exceptional workers employers sometimes dole out bonuses company wide to stave off jealousy among staffers bonuses may be dangled as incentives to prospective employees and they can be given to current employees to reward performance and increase employee retention companies can distribute bonuses to its existing shareholders through a bonus issue which is an offer of free additional shares of the company s stock understanding bonusesin workplace settings a bonus is a type of additional compensation an employer gives to an employee that complements their base pay or salary a company may use bonuses to reward achievements to show gratitude to employees who meet longevity milestones or to entice not yet employees to join a company s ranks bonuses can take various forms including cash stock or stock options they can be given to individuals teams or the entire company companies may also offer incentive bonuses such as signing bonuses for new hires referral bonuses for employees who refer successful candidates and retention bonuses to encourage employee loyalty performance bonuses are given for exceptional work and can be given as annual bonuses spot bonuses or milestone bonuses in the united states bonuses are considered taxable income by the internal revenue service irs this means that employees are required to report their bonuses as part of their taxable income when they file their taxes 1 the employer is also required to report the bonus to the irs and to withhold taxes from the employee s bonus payment at the time it is paid the amount of tax withheld from a bonus payment is based on the employee s tax bracket and the tax laws in effect at the time the bonus is paid 2it s important for employees to be aware of the tax implications of bonuses as failing to report them can result in penalties and interest charges from the irs employees should keep good records of their bonus payments and consult with a tax professional if they have any questions about how to report their bonuses on their tax return the internal revenue service irs considers bonuses as taxable income which means employees will need to report any bonuses they receive when filing their taxes 1incentive bonusesincentive bonuses include signing bonuses referral bonuses and retention bonuses a signing bonus is a monetary offer that companies extend to top talent candidates to entice them to accept a position especially if they are being aggressively pursued by rival firms in theory paying an initial bonus payment will result in greater company profits down the line signing bonuses are routinely offered by professional sports teams attempting to lure top tier athletes away from competitive clubs referral bonuses are presented to employees who recommend candidates for open positions which ultimately leads to the hiring of said candidates referral bonuses incentivize employees to refer prospects with strong work ethics sharp skills and positive attitudes companies offer retention bonuses to key employees in an effort to encourage loyalty especially in downward economies or periods of organizational changes this financial incentive is an expression of gratitude that lets employees know their jobs are secure over the long haul holiday bonusessome companies hand out bonuses specifically during the december holidays season holiday bonuses can take various forms such as cash gift cards or other types of gifts they can be given to individual employees or to the entire company some companies give holiday bonuses to all of their employees while others only give them to certain employees such as those who have been with the company for a certain length of time or who have achieved certain performance goals some countries have codified holidays bonuses as part of the labor law aguinaldo for example is an annual christmas bonus that businesses in mexico are required by law to pay to their employees the payment sometimes called the thirteenth salary must be made by dec 20 of each year it is usually equivalent to 15 days of the employee s salary it is typically given to all employees regardless of their job title or length of service companies that fail to make an aguinaldo payment may be fined as much as 5 000 times the legal daily minimum wage 3 some other latin american nations such as costa rica and el salvador also require employers to pay their employees an aguinaldo 4performance bonusesperformance bonuses reward employees for exceptional work they are customarily offered after the completion of projects or at the end of fiscal quarters or years performance bonuses may be doled out to individuals teams departments or to the company wide staff a reward bonus may be either a one time offer or a periodic payment while reward bonuses are usually given in cash they sometimes take the form of stock compensation gift cards time off holiday turkeys or simple verbal expressions of appreciation examples of reward bonuses include annual bonuses spot bonus awards and milestone bonuses spot bonuses which reward employees who deserve special recognition are micro bonus payments typically valued at around 50 workers who reach longevity milestones for example 10 years of employment with a given firm may be recognized with additional compensation some businesses build bonus structures into employee contracts where any profits earned during a fiscal year will be shared amongst the employees in most cases c suite executives are awarded larger bonuses than lower level employees bonus inflationwhile bonuses are traditionally issued to high performing profit generating employees some companies opt to issue bonuses to lower performing employees as well even though businesses that do this tend to grow more slowly and generate less money some businesses resort to distributing across the board bonuses in an effort to quell jealousies and employee backlash after all it s easier for management to pay bonuses to everyone than to explain to inadequate performers why they were denied furthermore it can be difficult for an employer to accurately assess their employees performance success for example employees who fail to make their activity quotas may be very hard workers however their performance may be hampered by any number of conditions out of their control such as unavoidable production delays or an economic downturn special considerationscompanies are increasingly replacing raises with bonuses a trend that vexes many employees while employers can keep wage increases low by pledging to fill pay gaps with bonuses they are under no obligation to follow through because employers pay bonuses on a discretionary basis they may keep their fixed costs low by withholding bonuses during slow years or recessionary periods this approach is much more viable than increasing salaries annually only to cut wages during a recession in addition to employees shareholders may receive bonuses in the shape of dividends which are carved from the profits realized by the company in lieu of cash dividends a company can issue bonus shares to investors 5 if the company is short on cash the bonus shares of company stock provide a way for it to reward shareholders who expect a regular income from owning the company s stock the shareholders may then sell the bonus shares to meet their cash needs or they can opt to hold onto the shares | |
how much is a bonus usually | there is no set amount for bonuses in the united states as they can vary widely depending on the industry the size of the company and the employee s job title and performance bonuses can range from a few hundred dollars to several thousand dollars or more depending on the circumstances in some cases bonuses are a fixed amount that is determined in advance such as a signing bonus for a new hire or a retention bonus to encourage an employee to stay with a company in other cases bonuses are based on performance and would depend on an employee s individual contributions or the success of the company | |
do bonuses count as salary | bonuses are compensation paid above and beyond one s base salary they are thus not considered part of an employee s salary or wages but are treated as additional income in the united states bonuses are considered taxable income by the internal revenue service 21 | |
why do companies give bonuses | companies give bonuses to employees for a variety of reasons such as to | |
what is bonus depreciation | bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets such as machinery rather than write them off evenly over their useful life bonus depreciation is also known as the additional first year depreciation deduction understanding bonus depreciation | |
when a business buys an asset the tax treatment for that asset is traditionally to spread its cost of over its useful life this process known as depreciation reduces a company s net earnings and tax liability | bonus depreciation is an accelerated business tax deduction instead of allocating the cost evenly over the life of an asset congress enacted rules that allow businesses to deduct a fixed percentage of an eligible asset s cost upfront although a company might otherwise expense the same total amount over the asset s life bonus depreciation gives it a substantial tax break right away the tax cuts and jobs act passed in 2017 made major changes to the rules on bonus depreciation most significantly it doubled the bonus depreciation deduction for qualified property as defined by the internal revenue service irs from 50 to an initial 100 the 2017 law also extended the bonus to cover used property under certain conditions history of bonus depreciationbonus depreciation has been around since 2002 but has changed over the years as the law has been updated qualifying assets for bonus depreciationbonus depreciation is only applicable to certain business assets for example tangible property must have a maximum useful life of 20 years under the tax cuts and jobs act eligibility requirements also stipulated that the rules explicitly disqualify certain types of assets from being eligible for bonus depreciation under the tax cuts and jobs act assets are not eligible if they are bonus depreciation rules can be complex and are subject to change so it s useful to consult a tax advisor who specializes in them | |
how to report bonus depreciation | bonus depreciation is reported on federal tax returns using irs form 4562 depreciation and amortization including information on listed property this form is also used to report or claim other types of depreciation such as the section 179 deduction 2to figure the depreciable base of the asset the business should subtract any credits or deductions allocated to the property from the basis of the asset special treatment exists for assets acquired in a like kind exchange or involuntary conversion if businesses decide it would be more advantageous to recognize depreciation over the life of the asset instead of using an accelerated method such as bonus depreciation they can elect not to take it to make this election they must attach a statement to their tax return indicating which class of property they wish to not make the election for once the election has been made the decision cannot be revoked without the irs s consent 3if a business sells property that it claimed a special depreciation deduction for it is often required to recognize any recaptured amount as ordinary income 3bonus depreciation schedule and phaseoutthe current bonus depreciation percentages depend on when the eligible property was placed in service here is how bonus depreciation is scheduled to be phased out 4bonus depreciation vs section 179section 179 is another tax provision that allows businesses to claim a larger depreciation deduction for qualifying property for the tax year it was put into service broadly speaking section 179 rules are often more flexible in terms of timing than bonus depreciation rules under section 179 a business can elect to save certain assets for future tax breaks or claim only a portion of the cost and defer the other portion for a future tax year with bonus depreciation the amount of depreciation that s allowable is strictly defined however bonus depreciation may apply to higher spending amounts bonus depreciation is not capped in dollar terms a multimillion dollar deduction for the cost of a single asset may be recognized in a single year on the other hand section 179 deductions are limited by law as the irs explains for tax years beginning in 2023 the maximum section 179 expense deduction is 1 160 000 this limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds 2 890 000 5in addition the irs notes the maximum section 179 expense deduction for sport utility vehicles suvs placed in service in tax years beginning in 2023 is 28 900 5each of these two tax breaks have rules that can make them more or less appealing to certain types of businesses some real estate improvements for example do not qualify for bonus depreciation but do qualify for section 179 treatment on the other hand section 179 deductions are limited to annual business income while bonus depreciation can exceed that amount it is also possible to claim both bonus depreciation and section 179 deductions in the same tax year | |
what are the benefits of bonus depreciation | bonus depreciation allows businesses to reduce their taxable income by writing off a significant portion of the cost of eligible assets in their first year | |
do vehicles qualify for bonus depreciation | yes vehicles are eligible for bonus depreciation although the amount is limited for tax year 2024 that limit is 20 400 6 | |
should i take bonus depreciation | electing to take bonus depreciation is often favorable for businesses seeking to minimize their short term tax liabilities though future year liabilities may be higher due to having a lower amount of depreciation to claim this may also create a net business loss that can be rolled over and carried to future years there may also be situations where it makes more sense to elect out | |
what assets qualify for bonus depreciation | the irs defines qualifying property for bonus depreciation purposes as 1 tangible property depreciated under the modified accelerated cost recovery system macrs with a useful life of 20 years or less 2 certain computer software 3 water utility property and 4 qualifying film television or live theatrical productions 7the bottom linebonus depreciation is a tax incentive for businesses that purchase certain new assets it is similar to section 179 depreciation but has higher dollar limits in some cases bonus depreciation is currently phasing out and scheduled to end as of 2027 | |
what is a bonus issue | a bonus issue also known as a scrip issue or a capitalization issue is an offer of free additional shares to existing shareholders for example a company may give one bonus share for every five shares held companies issue bonus shares to attract further investment and reward shareholders understanding bonus issuesbonus issues increase a company s outstanding shares but not its market capitalization companies usually fund a bonus issue through profits or existing share reserves the issuance of bonus shares is not taxable however shareholders must still pay capital gains tax if they sell them for a net gain a company allocates bonus issues according to each shareholder s stake bonus shares do not dilute shareholders equity because they are issued in a constant ratio that keeps the relative equity of each shareholder the same as before the issue for example a three for one bonus issue entitles each shareholder three shares for every one that they hold before the issue a shareholder with 1 000 shares receives 3 000 bonus shares 1 000 3 1 3 000 2a company s share price proportionally adjusts to the number of bonus shares issued |
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