Bonds

What are bonds?

A bond represents a loan you are making to a borrower with interest.
The borrower is typically a corporation or government.
Bonds are used to raise money for projects and operations.
When you buy a bond, you are buying corporate/government debt.

Why buy bonds?

A real example:

The following is a real bond issued by Royal Caribbean Cruise Lines (RCL), retrieved on April 30, 2020.

This is what a typical bond will look like in an online broker’s interface.
A table of bond credit ratings.
Bond credit worthiness table.

What’s it cost? How much am I actually investing?

You can find this information under the “Offering” information.

Face Value

So can we finally know what this thing is actually worth?

How much would we make?

Understanding Profit Yield

If you’re not aware, a traditional investment is considered pretty great if it returns about 5% a year. That’s why this kind of bond can be attractive. It’s a higher risk since its credit rating is only BB, but it’s also returning 7.5% a year. It’s a 50% better investment (5% * 1.50) than even a “pretty great” one.

The YTM formula you’ll absolutely never use.
The less you pay, the more you make.

Intermission: Why Rich People Love Bonds:

At this point you know enough basics to start evaluating a bond! You actually probably already know more than anyone you’re going to talk to at your local bank. A bank investor will probably just tell you to buy a mutual fund and go away.

Back to the Show: To Buy or Not to Buy?

Let’s say you have your $1,000 in hand and you’re ready to invest. We’ve been looking at this RCL bond. Take a moment to consider what you’ve learned. Do we invest?

Failure to pay interest will immediately default the credit rating.

How Corporations Avoid Defaulting : A Case Against Stocks

There are a few different ways a corporation can finance its debt. Stock doesn’t come with a coupon price to worry about, so one of the most common ways corporations avoid defaulting on bonds is by issuing more stock. This is called “equity dilution.”

Spotting Risk of Default:

We now understand the Moody’s and S&P credit ratings, but there’s one more thing we want to check on our bond sheet: the Creditwatch status.

Let’s Invest Anyway!

If you understand the risks and want to buy the bond anyway, you’ll end up at an order screen.

Trade History

If you look in the bottom left, you can see that the total number of trades made so far on this day is 18. In the “Trade Time” column, we can see the time the each transaction happened. To the right of that, we can see the quantity of bonds bought or sold in each transaction.

For more finance, TA, and all things Japan, visit me on twitter @Nikadesh

Supplementary notes:

Brokers:
It’s worth noting that all bond transactions are done digitally now. When you buy and sell stocks or bonds, you aren’t getting a piece of physical paper in the mail like your grandfather might have. For that reason, it’s important to have a reputable broker. Examples are E-Trade and Vanguard. You don’t want to go through the nightmare of trying to lay claim to your bonds if some small-town two man brokerage you’re buying through goes bankrupt.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Nikadesh

Nikadesh

12 cats in a man suit. Finance and Japan. May your bags be full and your candles green.