What are bought and sold at workstations like these and have more dollars invested in them
than in any other type of securities?
The answer is bonds.
And while they may not offer the thrills of stocks, bonds do offer something more important
to many investors, the prospect of a regular income stream.
So how do you know what type of bond is right for you and when it's a good buy?
Stay tuned to find out.
This is a special edition of Nightly Business Report, the NBR guide to buying bonds featuring
Paul Kangas, Susie Garrett, and the NBR team.
When you think of bonds, what comes to mind?
Maybe home runs as in Barry Bonds or how about risk as personified by agent 007, James Bond?
Well, I'm sorry to disappoint you, but investing in bonds isn't likely to put you in the same
league as either of those two dashing men.
In fact, bonds are more like the Rodney Danger field of investing.
They're frequently put down by hot shot investors as being predictable and boring.
But let's face it, in investing, many of us would rather have a sure thing than excitement.
And if that describes you, then you really should consider adding bonds to your portfolio.
And while bonds do have their risks, those risks can be minimized if you know how to
handle them.
So what are bonds and how do they work?
Here's correspondent Erica Miller to fill us in.
Yes, I do have an ample supply of these.
How many would you like?
It may seem like a stock brokerage, but the brokers at this office are not selling ownership
stakes in corporations.
Instead, they're selling bonds.
Technically speaking, a bond is a loan.
And as the bond holder, you are the lender.
While stocks make no promises, a bond is a guarantee to repay a sum of money with interest
over a specified period of time.
A bond is basically a loan.
It is a corporation or a government, and it can be a state or local government or it can
be a country's government going to investors, individual or institutions, and saying, hi,
we'd like to borrow money, and the longer you agree to loan us money for, the more interest
we'll give you.
Bonds are called fixed income securities because their interest payments are set at a fixed
rate and they generally don't change until the bond matures.
Because those payments come on a regular schedule, bonds are often recommended as an investment
for people who are retired or nearing retirement.
They are also purchased by younger investors who want to diversify and protect their portfolios.
Another point about fixed income securities that a lot of people aren't aware of is that
they don't correlate very well with other asset classes.
For example, a lot of times when equity markets are down, bond prices are up.
What you tend to see then is that lower correlation actually reduces the risk of the overall portfolio.
The proceeds of bond offerings are used in many different ways.
The U.S. government uses bonds to fund its operations, from the military to Medicare.
State and local governments use them to pay for new schools, bridges and highways.
Companies often issue bonds to raise money for business expansion.
When a company decides to issue bonds, it contacts its investment bank to initiate or
underwrite a bond offering.
They would then work with one or a group of those underwriters, depending on the size
of the transaction, to begin to flesh out optimal timing, the selection of maturity,
the type of market to hit in terms of currency targeted to U.S. investors or to global investors.
As in an initial public offering of stock, the underwriters support the offering by buying
the entire lot of bonds.
They are then responsible for reselling the bonds to retail investors through their broker
networks.
This process is known as the primary market for a bond issue.
Unlike stocks, there is no central exchange for bonds.
A few corporate bonds are traded publicly on exchanges, but most are bought and sold
through a vast electronic network, connecting bond trading desks of major brokerage firms.
This trading constitutes the secondary market for bonds.
The participants are financial institutions, pension funds, mutual funds and governments
around the world.
A small investor generally buys bonds through a retail broker or through a bond fund.
Many conservative investors buy bonds when they are issued, live off the interest until
the bond matures, then reinvest the principal.
More aggressive investors like to trade bonds as they might stocks.
Once issued, the price of a bond fluctuates and is determined by supply and demand.
If people just are hungry for bonds, let's say they're worried about the stock market
or other kind of investments, they'll all pile into bonds and push the price up, which
then pushes the yield down.
So whether it's for steady income, portfolio protection or profits, many Americans are
finding bonds to be useful investments.
Erica Miller, Nightly Business Report, New York.
When it comes to buying a bond, there are several factors that you need to consider.
The first is the term of the bond, which is determined by its maturity date.
That's important because when a bond matures, the bond issuer pays you back the principal
or the amount it borrowed and the interest payments then stop.
Generally, the longer the bond, the higher its annual interest rate or coupon.
But some bonds can be called, which allows them to be paid off sooner than their maturity
dates.
And depending on your situation, that can be a plus or a minus.
The next factor you need to consider, the bond's quality.
With almost any bond, there are some risks.
One is credit risk, the risk that you won't be paid the interest promised or that you
won't get your principal back.
We'll be talking more about that later.
Another risk is that over the years, inflation will eat away at the return you get from your
bond.
The problem is that although inflation goes up, the rate most bonds pay doesn't.
And as the bondholder, your money is locked in at the bond's fixed rate.
Besides those factors, whether a bond works for your portfolio depends mostly on what
type of bond it is.
Here's Diane Estabrook with a look at the various types of bonds and their pros and
cons.
Just as the U.S. government dominates much of American life, it also is the largest issuer
of bonds in this country.
The federal government issues a variety of bonds that differ in terms of yield and maturity.
Right now, notes have the longest maturities and T-bills have the shortest, with the interest
rates on both set by the market.
The way that works is big investment houses bid on these issues at regularly scheduled
auctions.
Then, individuals can buy them at the auction's prevailing rate.
Individuals can also buy smaller denomination savings bonds.
But it's important to note that these can be redeemed early only by paying a penalty.
All U.S. treasuries have one thing in common.
They are considered the safest bonds because they are backed by the full faith and credit
of the United States.
But treasuries have drawbacks.
They have lower yields compared to other bonds.
They are subject to federal income taxes and they can go up and down in price in response
to economic pressures.
The longer the maturity, the greater those swings can be.
Usually, if you want a shorter maturities because you need liquidity, you need that
money back in a short period of time and you don't want to take the variations that would
happen if interest rates were to change and the bond would become more or less valuable.
So if you needed your money back soon, you'd buy something within a year or something short.
Also popular with conservative investors is another type of bond.
Mortgage-backed debt instruments issued by two government agencies, the Government National
Mortgage Association or Ginny May and the Federal Home Loan Mortgage Corporation or
Freddie Mac.
While they are backed by those agencies, they are often retired early, requiring the bond
holder to reinvest his or her money elsewhere.
Municipal bonds or munis are issued by state and local governments.
They are divided into two categories, general obligation and revenue.
General obligation bonds are backed by the full financial resources of the issuing government,
usually meaning their payments come from tax revenues.
Revenue bonds depend on revenues raised by a particular project, like a toll road or
a housing project.
Both types of municipal bonds share the advantage of being exempt from federal income taxes,
and often state income taxes, too.
The disadvantage, though, is somewhat lower yields and some risk, especially for revenue
bonds.
If you're a municipal and you might think, oh, that's government, it's not always the
safest thing.
There are ways for municipalities to attach their names to bonds that might carry some
risk because they back projects that have a lot of risk involved and don't necessarily
have the backing of the municipality.
Corporate bonds are issued by both public and private corporations.
The advantage of buying corporate bonds is the yield, which is usually higher than yields
on government bonds.
But there is a trade-off to getting a better yield, and that is increased risk.
As a bondholder, you're a preferred lender, so you're going to get paid back first for
the equity holders.
But if the company's in bad enough shape, you could lose all your money.
Regardless of which bond type you choose, you are supposed to receive interest payments
or coupons throughout the life of the bond, unless you buy a zero-coupon bond, which pays
both interest and principal when the bond matures.
So there's a bond type for just about every portfolio.
The challenge for you is determining which one best suits your investment needs.
Diane Estabrook, Nightly Business Report, Chicago.
Once you've decided which type of bond is best for you, your next step is to locate
such a bond and to find out how much it will cost.
Right now for the small investor, it's harder to track down an individual bond for sale
than an individual stock, so a bond broker can help in that process.
But it also helps if you understand how bonds are priced.
The starting point is the bond's face value.
You'll recall that has nothing to do with the interest the bond pays, but is the principal
paid out when the bond reaches maturity.
In this case, let's say the face value is $10,000, and let's also assume this is a newly
issued bond, which tends to sell for the same amount.
In a case like this, when the face value and selling price are equal, the bond is said
to be priced at par.
If you think of it in percentage terms, a bond at par is selling for 100% of its face
value, and that's shortened to a bond price of 100.
But once a bond is traded, it often goes above or below its face value.
When that happens, the bond is trading at a premium or at a discount, and that's expressed
as percentage points above or below 100.
So if a bond with a face value of $10,000 is selling at a price of 102, it will cost
you 102% of its face value, or $10,200.
Similarly, if that same bond is selling at a price of 98, it will cost only $9,800 to
buy.
However, to really determine whether a bond is worth buying, you have to combine the bond's
offer price with its interest rate, or coupon.
That provides you with the bond's yield, which gives a better idea of what the bond's total
return is likely to be.
There are a few ways to measure a bond's yield.
The first is called the current yield.
That is simply the annual return on the dollar amount you pay for the bond, and you get it
by dividing the bond's interest rate by its purchase price.
Other useful measures are yield to maturity and yield to call.
These give a more accurate idea of the total return if you hold the bond until it matures
or is called.
Incidentally, in bond trading, amounts of less than a point are priced not in decimals,
but in fractions that go as low as 1.32 of a dollar.
And in discussing bond prices, you ask for the bond's bid-ask spread rather than a price
quote.
The bid is the highest price someone is offering to buy the bond, while the ask represents
the lowest price at which a bondholder will sell.
If you want to buy the bond, you can match the ask price or make a lower offer and hope
that it gets accepted.
Bonds do have one advantage over stocks.
At least when you're buying a bond, you don't have to add on a broker's commission.
It's already built into the price.
So once you have that information, how can you tell if a particular bond is worth buying?
To help us answer that question, joining us is Sharon Saltsgiver-Wright, who's the author
of the book Getting Started in Bonds, and thank you for joining us.
Hi, Susie.
Thank you.
Sharon, one of the issues that face first-time buyers is this confusion between the price
of a bond and this yield go in opposite directions, and the confusion is that if the yield is
higher, shouldn't the bond be more valuable?
Indeed, it is more valuable.
Yield is what you want to look at on a bond to ascertain its value.
Price tells you nothing more than whether interest rates have gone up or down since
the bond was issued.
So to compare bonds, what you want to compare is the yield on the bond.
So why is the yield to maturity or the yield to call the most important number in determining
a bond's return?
What it does is it takes a coupon and assumes reinvestment at the yield to maturity so that
you get more of a total return for your investment.
So if you sell the bond before its yield or before its call, before its maturity or before
its call, then the return you could be getting could be less than what you were expecting.
That's correct.
If it's called early, usually bonds are called early if the interest rates have fallen, and
so therefore you're getting your money back sooner and you have to reinvest in lower interest
rates.
Therefore, you don't get the projected yield that you had assumed.
Also, in real life, you're not reinvesting at the yield to maturity.
Interest rates are moving all over the place, and so your real yield will be different than
what you had estimated.
All right.
Let's talk about the different kinds.
You have bonds that have short-term, intermediate, and long-term maturities.
Why is it that longer bonds tend to pay higher interest, and why are they so much more volatile?
Those are two separate issues.
The first is why do they tend to pay more interest?
Since World War II, we have tended to be in an inflationary environment, so the farther
away that you are from now, your returns will probably be eaten away by inflation, so the
issuer has to offer you more yield to entice you to buy it farther out so that your return
won't be eroded as much by inflation.
The second issue is the maturity date.
Why is the volatility more?
It has to do with present value of money, which is just a fancy way of saying, would
you rather have a dollar today or a dollar tomorrow?
Rather have a dollar.
Much rather have a dollar today.
What it means is because you... Well, for a number of reasons, if you want to spend
it right now and buy something, but more because you can reinvest that, and then you have the
time value of money.
You have more time to compound that money, so it's more valuable to have a dollar now.
Therefore, you're going to have to... If you are borrowing my money, or you being the
issuer of the bond, you're going to take my money from me because that's all a bond is,
is a loan.
I, the investor, am loaning you money, so if I'm going to loan you my money, you have
to pay me a higher rate for tying up my money for a longer period of time.
Now, for an investor who's going to hold a bond to its maturity, does it really matter
that the price fluctuates as long as that investor continues to get his interest?
Absolutely not.
In fact, don't even look at the value of your bond when you get those statements.
Just look at what interest you're earning, and laugh all the way to the bank, because
you know that at some point, you're getting that principle back, and that's the beauty
of a bond, and that's why they work so marvelously to diversify a stock portfolio.
You can ladder maturities that you know that every year, you're going to have a portion
of your portfolio coming due.
You could put it in the stock market, you can put it back into the bond market.
That acts as a cushion for your portfolio, and why everyone should be in some type of
bond or other.
Tell us about accrued interest.
We hear that word a lot.
What is it, and how does it affect what you pay for a bond?
All it means is that, since bonds pay twice a year, semi-annually, say in January and
July is when I'm going to get my interest, in between time, I'm earning money every day.
I'm accruing some of that interest every single day.
Now, if I sell it in, say, March, I'm entitled, because I own the bond, I'm entitled to the
interest that I earn from January to March that has not been paid out.
It won't be paid out until July.
So the person that I am selling the bond to has to pay me, at the time of the trade, that
interest from January to March.
Let's talk a little bit about taxable and tax-free bonds.
How can an investor tell when it pays to get a lower interest, tax-free bond, rather than
a taxable bond?
Well, luckily, there is a secret decoder ring, and that's called the taxable equivalent yield.
And what that does is morph your tax-exempt yield into a taxable equivalent so that you
can compare the two bonds.
How you do this is you take the tax-exempt yield and you divide it by one minus your
tax rate.
Okay, let's say that there's a tax-exempt bond yielding 5.45%, and our tax rate is 25%.
What we do is you take one minus 25%, so that would be 0.75.
You divide that into the 5.45%.
That comes out to 7.27%.
What do you do with that number?
Well, that's your taxable equivalent yield, 7.27.
So if a taxable bond is yielding more than 7.27 by the taxable, if it's yielding less
than 7.27 by the tax-exempt.
The other thing to be aware of is that many states tax-exempts are double tax-exempt,
meaning they are exempt from both state and federal taxes.
If that's the case, and you want to be very particular when you're comparing your bonds,
is you have to adjust your tax rate.
So what you do is you multiply your state tax and your federal tax.
You subtract that from your federal tax rate, and then you use that as your tax rate.
That's your adjusted tax bracket.
Let's move on to zero-coupon bonds.
What are the pluses and minuses?
First I'll define what a zero-coupon bond is.
It's meaning that it doesn't pay out any interest until maturity.
And at maturity, this is what most people don't realize.
It pays the principal, the face value.
It pays the interest, all of the interest, and it pays the interest on the interest.
So in essence, a zero-coupon bond internally compounds for you at the rate the yield to
maturity.
It actually does what the yield to maturity does for you.
It compounds at that rate and pays it all out.
Now this gets back to the present value of money.
Zero-coupons will be far more volatile than a like-coupon bond with the same maturity,
because you're getting all your money later.
And we mentioned you'd rather have a dollar now than a dollar later.
With a coupon bond, you're getting some money at different times in the form of interest
payments.
In a zero-coupon, you don't have that.
You get it all at once.
So like equal maturities, the zero-coupon will be far more volatile.
Just to wrap it up, what would you say is the most important factor in determining a
good buy for a bond?
And what are the most important numbers to look at in determining that?
You need to be very cognizant of comparing the same bonds, for instance, like maturity,
like coupon, and then you can compare the yields to see which is the better value.
Do not look at the price, that only tells you how big a check you have to write.
Sharon, this has been very helpful.
Thank you so much.
You're welcome.
And we've been speaking with Sharon Salzgiver, right, author of Getting Started in Bonds.
Different bonds have different levels of risk, and those risks should be considered before
you buy any bond.
Jeff Yastein reports on how a bond's risk can be measured and managed.
When you buy a bond, you have the word of its issuer that you will be paid both the
interest payments that are due at regular intervals and the principal that's due when
the bond matures.
But if its financial fortunes take an unexpected turn for the worse, a bond issuer can have
trouble making those debt payments.
When that happens, a bond is said to be in default.
Now, how can you keep from getting stuck with such a bond?
Well, the one way to do that is to judge accurately the ability of the bond issuer to pay its
debt payments to you, the bond buyer.
Well, there are firms such as Moody's and Standard & Poor's whose job is to research
the finances of bond issuers.
There's a host of factors considered, and they vary from sector to sector.
Again, we're looking at the overall financial strength of the credit, and so we're monitoring
business conditions, economic environment, competitive environment, and of course the
performance of the company.
Standard & Poor's uses a rating system of As, Bs, and Cs to signal whether a particular
company's bonds are a good credit risk or a bad one.
Its competitor, Moody's, uses a different series of letters to show similar judgment.
In the Standard & Poor's system, at the top of the scale is AAA, considered the safest.
Other bond issuers might receive a AA, or moving down the scale, perhaps a BB-, ratings
from AAA to BBB- are called investment grade.
Firms with ratings below BBB- are said to have junk bond status and indicate greater
concerns about the company's health.
However, there is a tradeoff.
The safer a bond is considered, the less it will pay you in interest.
On the other hand, a company considered higher risk will pay a much higher interest rate
to make its bonds attractive to buyers.
So you say, how much is the additional risk, actually, in those situations?
And the answer is that it depends on, to some extent, what is the economy today and what
is the likelihood of them suffering through current economic conditions.
So again, you look at what businesses are they in, is that business vulnerable to the
current economic conditions or not, and make your judgment accordingly.
As an example, the bonds considered the safest in the world are U.S. government treasury
bonds, reflecting the nation's long-term stability and strength.
In fact, U.S. government bonds are considered so safe they carry no rating.
In the 1990s, a 10-year government bond paid anywhere from 7 to 4 percent.
At the other end of the scale, the interest rates on junk bonds, sometimes called high-yield
bonds, were considerably higher, paying up to 15 percent.
However, junk bonds don't always live up to the name.
In the 1980s, Michael Milken was among the first to realize that, and by aggressively
marketing them as high-yield bonds, he made billions.
Even today, by carefully choosing such bonds, analysts say those who can accept the risks
can often reap high rewards.
There's nothing better in my mind than collecting a 10, 15, 20 percent rate of return while
you're waiting for the economy to improve and for these securities to actually appreciate.
I mean, you know, it sure beats waiting for dividends to be resumed on a common stock.
Those bond ratings are not foolproof, some people stick to buying U.S. Treasury bonds.
But if you like tax-free issues, you can also go another route by buying an insured municipal
bond.
In that case, an insurance company will guarantee that you get your principal back if the issuer
misses a payment.
Now, insured munis usually pay a little less in interest, but they do let you sleep easier
at night.
Jeff Yasteen, Nightly Business Report, Miami.
The goal in any type of investing is to maximize your returns while keeping your risks within
acceptable limits.
So what factors do you need to take into account to build a balanced bond portfolio?
To help us answer that, joining us from San Francisco is Gail Seneca, Chief Investment
Officer and Managing Partner of Seneca Capital Management.
Seneca manages over $15 billion in assets, including $6.5 billion in bonds.
Gail, nice to have you with us.
Hi, Susie.
Gail, we know that bonds have less risk than stocks, but they still do have risk.
Does this mean that it's important not to be overly invested in a single bond issue
or maturity?
Definitely.
Just like in stocks, it makes sense in bonds to have a diversified portfolio owning more
than one kind of security, perhaps a portfolio of different credit qualities, perhaps of
different maturities, and perhaps of different coupons.
So if you want to invest in bonds, do you have to have enough money to buy a variety
of bonds?
Yes, it makes sense because bonds, unlike stocks, don't trade in small amounts.
And so it makes sense to buy bonds.
If you're working with a small amount of money, let's say less than a half a million dollars
perhaps in a bond portfolio, it's important to use a diversified approach to build that
portfolio, and that means probably for most investors, one would use a bond fund as opposed
to buying individual bonds.
Is there a downside to owning a bond fund versus an individual bond?
Well, certainly there are downsides to owning bond funds if you choose the wrong bond funds.
All bond funds, just like all bonds, will present different kinds of risks.
If you choose, for example, a bond fund with an extremely long maturity, the risk that
that bond fund presents would be very different than the risk of a bond fund with a very short
maturity.
So just as in buying individual bonds, buying individual bond funds requires that you really
know what risks you're taking on in the fund per se.
And isn't it the case that generally bond fund managers are trading bonds long before
they reach maturity?
So doesn't that make a bond fund more of a play on the direction of interest rates?
Well, I would think that probably it actually is a good thing that bond managers are trading
bonds before maturity, because what you point out, the direction of interest rates having
an impact on bond prices, is something that even an investor who buys a single bond and
holds it to maturity really can't get away from.
Let me explain why.
If an investor buys a single bond and thinks that he's going to earn a maturity, let's
say, of 5% or 6%, if he holds that bond until it expires, until it matures, there still
are points along the way, namely every six months, when income comes to that bond investor
in the form of the coupon payment that comes from a bond.
And that coupon payment needs to be reinvested in the market.
And so really, there's virtually no way, practically speaking, most bonds inherently have that
characteristic of containing interest rate risk, whether you own them individually or
whether you own them in the case of a bond fund.
You've mentioned a lot about bond maturities being an important factor.
So in buying a bond fund, is it wise then to invest in a fund that has short-term, intermediate,
and long-term bonds?
Definitely.
I would always advise that a bond fund that one chooses would be diversified by maturity.
And most bond funds, I think, these days really will very clearly categorize and advertise
what the maturity range is of the bond fund.
The most dangerous, from the point of view of price risk, at least, are bond funds which
are of extremely long maturity.
They might be called long-duration bond funds, or they might be called targeted maturity
bond funds.
But whenever a bond fund has an expected maturity of most of the bonds of, let's say, more
than 10 years, one's facing a very high level of price risk if interest rates change.
Gail, tell us about unit investment trusts.
Are they good for buy and hold investors to buy a diversified package of bonds?
Well, unit investment trusts have some appeal, particularly when interest rates are high.
And this is why.
Unit investment trusts are no more than a package of bonds which are purchased at the
onset of the investment on day one and are never traded.
And so an investor can participate in this package of bonds and simply hold that package
until all the bonds mature.
That may be appealing to investors when interest rates are high, because when interest rates
are very high, the possibility exists of being able to lock in, if you will, pretty high
rates of interest.
And you can do that by buying a unit investment trust.
We hear a lot about a strategy called laddering maturities.
How does that work?
It simply consists of buying a portfolio of bonds in which each rung, if you will, of
the ladder is established by buying a maturity year.
And then in the next rung, buying the successive maturity year.
So theoretically a person could buy a 10-year ladder in which each year a bond matured.
And as that bond matured, the person would then go and buy another bond which would reestablish
the ladder that had been set up.
The point of this sort of thing is simply that one constantly has availability of cash
on an every year basis, and theoretically one gets some diversification by maturity.
I point out, though, that this is a fairly simplistic and not necessarily the most effective
way to build a diversified portfolio.
Is there a way that individual investors can check bond prices?
Bond quotes obviously are not listed in the newspaper, so it's frustrating for bond investors.
Bonding is the right word, and there is no way for an individual investor to get a really
good handle on bond prices, with the exception of the treasury market.
In the treasury market, one can see where bond prices trade.
But most investors who might be interested in municipal bonds or corporate bonds or even
Ginny Mays or other kinds of mortgages don't have any access to price information.
There's no comparable clearinghouse that you have, for example, in the stock market.
There's no ticker.
So it's very frustrating for individuals to actually purchase bonds and know that they've
made a good purchase.
We've seen how the internet has revolutionized stock trading by giving individual investors
information and trading capabilities that used to be reserved only for the pros.
Do you see the internet revolutionizing the bond prices in any similar way?
Not anytime soon.
I mean, the problem is not that the internet could not do it.
Of course it could.
The problem is that there is no central clearinghouse of data, of information about bond prices.
And so none of it can be brought to the internet because it doesn't exist.
The frustration about all of this for individual investors is that one simply cannot get that
information.
And it's yet another reason why it probably makes sense for most people, most individual
investors, to look to a professional who does have access simply by being in the market
to transaction data, to price data.
Well, you've given us a lot of useful information today, and thank you so much.
Thank you, Susie.
We've been speaking with Gail Seneca, Chief Investment Officer and Managing Partner of
Seneca Capital Management in San Francisco.
So there is a lot to consider in building a bond portfolio.
But besides selecting the right individual bonds or bond funds, another factor you should
take into consideration is the state of the bond market.
Like the stock market, the bond market as a whole has its daily ups and downs with those
moves usually reflecting changes in the economic outlook.
But unlike stocks, which tend to go up along with the economy, the better the economic
picture, the worse it is for bonds.
That's because the mere hint of a rise in inflation or interest rates causes bond prices
to fall.
So how can you keep tabs on what's going on in the bond market on a given day?
One way is to tune in to Nightly Business Report and watch our bond market roundup.
The bond market's recent run-up took a breather today.
It begins by summarizing the factors that influence bond prices and then looks at activity
in representative securities of different maturities.
Experienced investors will tell you that buying a security is pretty easy.
The hard part is knowing when to sell.
That's also true when it comes to bonds, especially when you can choose between taking
a capital gain or holding a bond until it matures or is called.
And selling a bond is often easier said than done.
As Stephen Aug reports, part of the problem is that trades in the bond market can be few
and far between.
Some months ago I told my broker I'd like to sell some municipal bonds.
I asked how much I could expect to get.
He called back with a price way below what I thought they were worth.
He said, look, it's Friday afternoon.
The traders want to go home.
Call back next week.
You'll get a better price.
Sound far-fetched?
Not to Christopher Taylor.
He runs the Municipal Securities Rulemaking Board, the agency that regulates municipal
bond trading.
In the muni market, the dealer has to go out and find someone who is interested in your
particular bond, and the potential buyer has up to a million and a half different choices.
In fact, there is no organized market for municipal bonds, no real-time prices.
That's because there are one and a half million different issues.
Some of them never trade.
Others may trade only every few years.
People buy bonds for the stream of income that the bond yields.
And so they buy the bond with the idea that they're going to get a set amount of income
for the life of the bond.
In contrast, you buy a stock, and you hope that it goes up and that's why you sell it,
and that's why there's active trading in stocks.
So while there's no central market, there's a website called investinginbonds.com where
you can look up bonds and get a price on those few that have recently traded.
It's no different in corporate bonds.
Even many of those listed on the New York Stock Exchange seldom trade.
Kevin Rast, who trades bonds at the regional brokerage of Ferris Baker Watts, says he
prices bonds using treasury paper as a benchmark.
Let's take, for example, a AAA corporate bond.
With a rating like that, it'll trade somewhere around 60 to 80 basis points over the 10-year
treasury, which would put it in a five-and-a-half to a five-and-three-quarters type level.
The only really active bond market is in U.S. Treasury paper, and you can easily get current
prices.
So if it's tax-freeze or higher-yielding corporates you want, be prepared for a market in which
it's difficult to find a price.
Or buy a bond when it's first issued and hold it till maturity.
And don't worry about market prices.
Stephen Aug, Nightly Business Report, Washington.
I'm Suzy Garrop.
For all of us at NBR, thanks for watching.
And thanks from me as well.
I'm Paul Kangas, wishing all of you the best of bond buyers.