Bonds are similar to loans that have a specific amount paid back as a return on your investment. It may be less risky compared to stocks because the principal amount stays intact. Still, there are other risks involved in investing in bonds. If you are thinking of investing in bonds, start by understanding bond quotes.
What is a bond quote?
A bond quote is "the statement of a bond's price." Bond quotes are represented as a dollar value or as a percentage of the face value.
Where to find bond quotes
You can easily find bond quotes in the financial section of daily newspapers. Websites of newspapers are found online. Other financial web sites have bond tables as well. Some of these sites are:
Another option in finding bond quotes is to use online interactive tools. Yahoo offers a bond screener as does InvestinginBonds.com. This type of investment calculator lets you specify different bond characteristics like the bond type, price, maturity range, coupon range and more. Based on these characteristics, it will find the latest bond quotes matching your specifications.
Understanding bond quotes
Select a bond. Using a bonds table, choose the bond offered by a company or the government that interests you.
Coupon column. This tells you the percentage of the principal amount or par that will be paid annually. A coupon of 5% means that for a bond with a $1000 par value, $50 will be paid annually.
Maturity column. Gives the date when the principal amount will be repaid. Also, each year until maturity, using the above 5% coupon rate, the bondholder will receive $50.
Quoted Price. The quoted price shows the current market value of the bond. Some bond tables show both the bid price and the ask price. The price that the buyer is willing to pay is the bid price. The ask price is the amount a seller is willing to let go of the bond.
Yield column. The yield is the interest rate on the current bond's price. Remember that the coupon is based on the principal. The yield and the price are inversely proportional to each other. If the current price of the bond is higher than the par value, the yield is lower than the coupon. Expect a yield higher than the coupon if the price is lower than the par value.
Yield to Maturity. This represents the annual interest rate used if you hold on to the bond until maturity. It is assumed that you continually reinvest all the interest payments your bond receives using the rate equal to the bond yield. It also takes into account any profit or loss incurred due to the current price of the bond being over or under par.
Some bond quote tables include the credit rating of the company selling the bond as well as a column indicating whether the bond is callable or not. Callable bonds can be redeemed earlier than the maturity date. The credit rating gives you an idea of the company's current creditworthiness.
Bonds are securities issued by a large corporation or the government in exchange for a loan. Learning how to read bond quotes is often daunting and confusing for individuals who are new to the financial market. Before you jump head on into stocks and bonds, you should do lots of research, read blogs and find a financial broker who can help you navigate the world of securities, yields, coupons, bids, returns and more.