Bond 学习笔记

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Bond Market Terminology

http://www.finpipe.com/tradebnds.htm

BOND DEALERS

While investors can trade marketable bonds among themselves whenever they want, trading is usually done with bond dealers, more specifically, the bond trading desks of major investment dealers. The dealers occupy centre stage in the vast network of telephone and computer links that connect the interested players. Bond dealers usually "make a market" for bonds. What this means is that the dealer has traders whose responsibility is to know all about a group of bonds and to be prepared to quote a price to buy or sell them. The role of the dealers is to provide "liquidity" for bond investors, thereby allowing investors to buy and sell bonds more easily and with a limited concession on the price. Dealers also buy and sell amongst themselves, either directly or anonymously via bond brokers. The name of the trading game is to take a spread between the price the bonds are bought at and the price they are sold at. This is the main way that bond dealers make (or lose) money. Dealers often have bond traders located in the major financial centers and are able to trade bonds 24 hours a day (although not usually on weekends).

BOND INVESTORS

The major bond investors are financial institutions, pension funds, mutual funds and governments, from around the world. These bond investors, along with the dealers, comprise the "institutional market", where large blocks of bonds are traded. A trade of $1-million-worth of bonds would be considered a small ticket. There is no size limit, and trades involving $500 million or $1 billion at a time can take place. There similarly is no size restriction in the "retail market," which essentially involves individual investors buying and selling bonds with the bond trading desks of investment dealers. However, the size of trades is usually under $1 million.

Coupon
        The percentage interest to be paid on a bond in the course of a year. The interest is usually payable semi-annually, although it can also be payable monthly, quarterly, and annually. If a bond worth $100,000 at maturity has a 6% coupon, this means $6000 in interest is payable over a year's time.
Maturity
        The date the bond will be redeemed or paid off. If the same $100,000 bond has a maturity date of June 1, 2008, then the investor is due to be paid off in full at that date.

Price
        The quoted price is usually based on the bond maturity at a price of par, or 100.00. In the case of the above-mentioned bond 6% of June 1, 2008, if the price is $105.13, this means the bond is at a 5.13% premium to its maturity price (par or 100.00). An investor who pays $105.13 for the bond will receive only $100.00 back on maturity.

Yield
        The term "yield" usually means "yield to maturity." At a price of $105.13 for the 6% of June 1, 2008, the yield to maturity is 5.31% The yield to maturity takes into account the fact that the coupon payment is 6% per year, but that the bond is maturing at a different price than its current price. The calculation also assumes that the coupon payments each year are re-invested at the yield to maturity (5.31% in this case).

Bid
        The price the trader will pay for a bond.

Offer(Ask)
        The price at which the trader will sell a bond.

Bid-offer spread
        The price difference between what the trader will buy a bond at, and the price at which the trader will sell a bond. The difference on highly liquid and tradeable government bonds is usually only a few cents. But it can be as much as $1 or more on illiquid bonds, such as some corporate bonds, which are not easily traded.

Basis points
        A basis point is a hundredth of a percentage point. For instance, if a yield moves from 5.5% to 5%, it has moved 50 basis points.

Spread over governments
        Non-federal government bonds are often quoted on the basis of a yield spread over a comparable government bond. A corporate bond with a similar coupon and maturity date could easily be 100 basis points higher in yield than a federal government bond. In the terminology of bond traders, this corporate bond is "100 beeps (basis points)" over governments. Traders often bid and offer on a spread basis. For instance, in the case of this corporate bond, the trader could have a bid price of 105 basis points over governments, and an offer price of 95 basis points over governments. The bid-offer spread is 10 basis points, with 100 basis points being the mid-point of the range.

"Bells and Whistles"
        What this refers to are special features for specific bonds. For example, a bond may mature on June 1, 2008, but there may be a special feature that allows the issuer to "call" the bond back on an earlier date, known as the call date. There are many other such special features--too many to cover in a brief article. The buying and selling of bonds is done on a "buyer beware" basis. Therefore, it is important for investors to inquire about any special features before making a commitment.

Bond auctions
        Federal governments in North America has move to a system of auctions to sell their bonds to investors. Most bond dealers are allowed to bid at the auctions, and then re-distribute the bonds to investors. There is also a "non-competitive" element to the auctions which permits individual investors to buy bonds at the auction average price and yield.

New issues
        Most other governments and corporations use a different system of distributing new issues, namely offering them to investors through bond dealers. The bond dealers earn a commission for distributing the bonds to investors. The offering can be on a fixed price basis, or on the basis of a fixed yield spread to comparable federal government bonds. There are variations in approach. Sometimes the bond dealers act merely as agents, on a best efforts basis. But in recent years, the most common approach is for the issuer to sell the bonds (still with commission attached) to the bond dealers, which then re-sell to investors. In this latter case, the bond dealers are taking a risk that they can actually re-sell the bonds, and that they can re-sell them at the specified price. In a fast-moving bond market, where prices are changing by the second, this can be a risky approach for the bond dealers.

Book-based bonds
        In the not to distant past, when bonds were bought and sold, they physically had to be moved from one institution or dealer to another. In financial centres, this involved dozens of messengers walking from building to building with large amounts of bonds in their briefcases. In recent years, however, bonds have gone "book-based". What that means is that the bonds are lodged with a central trustee and do not phyically move from there. Instead, the dealers and institutions have accounts set up with the trustee, and when a bond trade takes place, the buyer's account is credited with the bonds, while the seller's account is debitted. This all happens electronically and quickly, without the risk of the bonds physically going missing. Most government and corporate bonds are now book-based, and investors are discouraged from taking physical possession of the bonds.

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Types of Bonds

Most bonds you'll come across have been issued by one of three groups: the U.S. government, state and local governments or corporations. But to confuse things, these entities issue many different types of bonds that run the gamut in terms of risk and reward. Here's a quick introduction to the ones you'll encounter most often.

U.S. Government Bonds
The bonds issued by Uncle Sam are called Treasurys. They're grouped in three categories.

    * U.S. Treasury bills -- maturities from 90 days to one year
    * U.S. Treasury notes -- maturities from two to 10 years
    * U.S. Treasury bonds -- maturities from 10 to 30 years

Treasurys are widely regarded as the safest bond investments, because they are backed by "the full faith and credit" of the U.S. government. In other words, unless something apocalyptic occurs, you'll most certainly get paid back. Since bonds of longer maturity tend to have higher interest rates (coupons) because you're assuming more risk, a 30-year Treasury has more upside than a 90-day T-bill or a five-year note. But it also carries the potential for considerably more downside in terms of inflation and credit risk (see previous lecture).

Compared to other types of bonds, however, even that 30-year Treasury is considered safe. And there's another benefit to Treasurys: The income you earn is exempt from state and local taxes. (however, not from Federal income taxes)

Municipal Bonds
Municipal bonds are a step up on the risk scale from Treasurys, but they make up for it in tax trickery. Thanks to the U.S. Constitution, the federal government can't tax interest on state or local bonds (and vice versa). Better yet, a local government will often exempt its own citizens from taxes on its bonds, so that many munis are safe from city, state and federal taxes. (This happy state of affairs is known as being triple tax-free.)

These breaks, of course, come at a cost: Because tax-free income is so enticing to high-income investors, triple tax-free munis generally offer a lower coupon rate than equivalent taxable bonds. But depending on your tax rate, your net return may be higher than it would be on a regular bond.

Corporate Bonds
Corporate bonds are generally the riskiest fixed-income securities of all because companies -- even large, stable ones -- are much more susceptible than governments to economic problems, mismanagement and competition. Cities do go bankrupt, but it's infrequent. Not so rare is the once-proud company brought low by foreign rivals or management missteps. Pan Am, LTV Steel and the Chrysler bankruptcies of 1979 come to mind.

That said, corporate bonds can also be the most lucrative fixed-income investment, since you are generally rewarded for the extra risk you're taking. The lower the company's credit quality, the higher the interest you're paid. Corporates come in several maturities:

    * Short term: one to five years
    * Intermediate term: five to 15 years
    * Long term: longer than 15 years

The credit quality of companies and governments is closely monitored by two major debt-rating agencies: Standard & Poor's and Moody's. They assign credit ratings based on the entity's perceived ability to pay its debts over time. Those ratings -- expressed as letters (Aaa, Aa, A, etc.) -- help determine the interest rate that company or government has to pay.

Corporations, of course, do everything they can to keep their credit ratings high -- the difference between an A rating and a Baa rating can mean millions of dollars in extra interest paid. But even companies with less-than-investment-grade (Ba and below) ratings issue bonds. These securities, known as high-yield, or "junk," bonds, are generally too speculative for the average investor, but they can provide spectacular returns.

Zero-Coupon Bonds
Zero-coupon bonds are fixed-income securities that don't make interest payments each year like regular bonds. Instead, the bond is sold at a deep discount to its face value and at maturity, the bondholder collects all of the compounded interest, plus the principal.

Why would you want to do that? Zeros are usually priced aggressively and are useful for investors who are looking for a set payout on a given date, instead of a stream of payments that they have to figure out where to invest elsewhere. People saving for college tuition and retirement are the prime targets. The SmartMoney college portfolios (see our College Investing section) make use of zero-coupon Treasurys -- known as Treasury strips -- for two reasons. First, you can buy them in a maturity that matches the date your child will enter college. And, they generally have a slightly higher yield than a regular bond.

Zeros do have a tax drawback, however, unless you hold them in a tax-deferred retirement account or an education IRA. Since interest is technically earned and compounded semiannually, holders of zeros are obliged to pay taxes each year on the interest as it accrues. That means you have to pay the tax before you get the money, which might be a struggle for some investors.

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When Yield Goes Up, Price Goes Down

http://finance.yahoo.com/educati ... _Up_Price_Goes_Down

ALL RIGHT, we might as well dive right into the yield and price mess. Since the first bond hit Wall Street, it's the thing that has most confused beginning investors. You've probably heard the mantra at least once before: When yield goes up, price goes down, and vice versa. But if you're like most people, you haven't the faintest clue why.

Well, here goes...

So far, we've discussed bonds as if investors always buy and hold them until they mature. A lot of people do just that, but many others -- including the pros -- buy and sell them on the open market before they reach maturity. Consequently, the price of a given bond can fluctuate -- sometimes wildly. That means it's unlikely you'll ever be able to sell a bond for "par," or 100% of its face value.

We'll explore what drives price changes in the next lecture, but for now, consider what happens when the price goes up or down. As you already know, a bond's periodic coupon and its ultimate payout never change once the bond is issued. Consider a 30-year bond with a face value of $1,000 and a 6% ($60) coupon. If the price falls to $800, you'll still get $60 each year in interest and $1,000 when the bond matures. The same holds true if the bond's market price jumps to $1,200. Obviously, then, the $800 bond is a much better deal -- you're getting the same payout for $400 less.

OK, So What Does 'Yield' Mean?

Yield -- a bondspeak standard -- is a figure that captures this change in value. It's the percentage return your bond investment promises at any given price.

In its most simple incarnation -- known as "current yield" -- it can be expressed with this formula: Yield = Coupon/Price. When you buy a bond for face value, the yield is simply the coupon, or interest rate. But when the price fluctuates, the yield grows or shrinks to compensate in either direction.

Let's look at that 6% bond again. If you were to buy it for $1,000, the current yield would simply be 6% ($60/$1,000). But if the price drops to $800, the yield rises to 7.5%. Why? Because the guaranteed coupon -- $60 -- is now 7.5% of the $800 you paid for the bond ($60/$800). If the price rises to $1,200, the percentage shifts Yield to Maturity

Unfortunately, it gets even more complicated. In the real world, when people talk about yield, they're really talking about another figure, called "yield to maturity." This represents the total return you can expect if you buy a bond at a given price and hold it until it matures.

Yield to maturity includes the fact that the bond you bought for $800 will pay you $1,000 when it's due. It also assumes you reinvest the coupons at the same rate and figures in the compounding effect. If, in the above example, you add that $200 difference and the effects of reinvested coupons, the yield to maturity calculates out to 7.73% -- a significantly better deal than the original coupon of 6%.

Once you've grasped the inverse relationship between price and yield, you're ready to take on the bond market's next puzzler: If yields and prices move in opposite directions, how come both high yields and high prices are considered good things?

The answer depends on your perspective. If you're a bond buyer, high yields are what you're after, because you want to pay $800 for that $1,000 bond. Once you own the bond, however, you're rooting for price. You've already locked in your yield, and if the price rises, it can only be a good thing -- especially if you need cash someday and want to sell the bond to get at it.

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Risk vs. Reward: How Bonds Behave

JUST BECAUSE BONDS have a reputation as conservative investments doesn't mean they're always safe. Any time you lend money, after all, you run the risk it won't be paid back. Companies, cities and counties occasionally In fact, economists label the yield of the shortest-term U.S. bonds "the risk-free rate of return." (See Types of Bonds.)

Paradoxically, another source of risk for certain bonds is that your loan may be paid back early, or "called." This is known as prepayment risk. While it's certainly better than not being paid back at all, it forces you to find another, possibly less lucrative, place to put your money. When you buy a bond, the prospectus will indicate whether a bond is callable and give you a "yield-to-call" figure. If you have a choice, buy a bond without the call option.

Inflation
By far, the greatest danger for a buy-and-hold bond investor is a rising inflation rate. Nothing spooks bond traders more than cheerful headlines about full employment or strong economic growth. When the economic news is good, the bond markets often take it as a bad sign -- a harbinger of an impending period of slowly rising consumer prices. The hotter the economy, the worse the threat. And the more downward pressure on bond prices.

Why is inflation such a problem for bondholders? Think about it this way: Rising prices make today's dollars worth less in the future than they're worth today. Since a bond can lock up your money for as long as 30 years, a rising rate of inflation can have a particularly corrosive effect.

All this explains why bond traders live in a hall of mirrors. What you or I might consider good news, they often consider bad. The bond market itself is a minute-by-minute referendum on the threat of inflation. If the threat is high, prices fall and yields -- or interest rates -- rise. This is often an excellent time to buy bonds. But if you own them already, you're stuck.

Yield vs. Risk
Inflation risk, credit risk and prepayment risk are all figured into the pricing of bonds. The more risk, the higher the yield. It's also true that investors demand higher yields for longer maturities. The reason for that is obvious -- given enough time, a once-healthy corporation can go bankrupt and suddenly lose the ability to pay its obligations. Inflation could run rampant, seriously eroding the purchasing power of that $1,000 you're supposed to get back in 30 years. These things are unlikely or you'd never invest in the first place. But the longer you tie your money up in a bond, the more at-risk it is statistically.

The credit quality of companies and governments is closely monitored by the two major debt-rating agencies; Standard & Poor's and Moody's. They assign credit ratings based on the entity's perceived ability to pay its debts over time. Those ratings -- expressed as letters (Aaa, Aa, A, etc.) -- help determine the interest rate that a company or government has to pay when it issues bonds. The market determines the price -- and thus the yield -- after that.

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Treasury Bonds, Bills and Notes

U.S. government bonds are among the safest in world, they almost always have lower yields than other bonds of the same maturity. The advantage of Treasuries is that interest payments are exempt from local and state taxes (however, not from Federal income taxes). Treasury securities cannot be redeemed before maturity and do not have call provisions.

You can buy Treasuries through a broker, or you can buy them directly from the federal government, which holds regular auctions that individual investors can participate in. However, if you buy directly from the government, you can't redeem the security prior to maturity. You'd have to use the services of a broker to sell your bond in the secondary markets.

Treasury debt securities are classified according to their maturities:

    * Treasury Bills have maturities of one year or less.
    * Treasury Notes have maturities of two to ten years.
    * Treasury Bonds have maturities greater than ten years.

Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security. Investors often shorten the word Treasury to just the letter "T" when referring to these bonds. Thus, Treasury Bonds are known as T-Bonds, Treasury Notes are called T-Notes, and Treasury Bills are T-Bills.

Treasury Bills are issued in three maturities. Bills with 91-day and 182-day maturities are auctioned by the Treasury each Monday. 364-day Bills are auctioned every four weeks on Thursday, 13 times a year. The interest rate of T-Bills is determined at each auction, depending on what bidders are willing to pay. T-Bills do not make interest payments, however. Instead, they are purchased at a discount to face value. They are the only Treasury securities that sell at a discount.

U.S. Treasury Notes are issued in two-, three-, five-, and ten-year maturities. The two year and five year Notes are auctioned each month, while the three year Notes are issued quarterly, and ten year Notes are auctioned six times a year. All Notes pay interest twice a year, and expire at par value.

Treasury Bonds are usually issued in thirty-year maturities, and pay interest twice a year.

No matter what you're buying, you can often get a better deal when you buy direct. And the U.S. Treasury has a special program for individual investors to help cut out the middleman (in this case, your broker) and help you to purchase T-Bonds, Bills, and Notes.

The program is called Treasury Direct, and it allows you to set up an account to make purchases of Treasury securities at auction, along with all the big guns. The main attraction of Treasury Direct is that there are no brokerage fees or other transaction charges when you buy through the program. (There is a $25 per account annual maintenance fee, but only if your account is greater than $100,000.)

To set up a Treasury Direct account, you'll need to fill out an application form that you can download from the program's web site. The minimum investments in Treasury Direct are $10,000 for bills; $5,000 for notes maturing in less than five years; and $1,000 for securities that mature in five or more years. Interest is then paid into your Treasury Direct account, as is a security's par value when it matures.

Another advantage of Treasury Direct is that you can access your account on the Web to check account balances or reinvest a security when it matures.

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Municipal Bonds: A Primer

Municipal bonds ("munis") are what help local or state governments to pay for public projects, such as the construction or improvement of schools, schools, streets, highways, hospitals, bridges, low-income housing, water and sewer systems, ports, airports and other public works.

There are many different types of municipal bonds, including general obligation bonds, limited and special tax bonds, industrial revenue bonds, revenue bonds, housing bonds, moral obligation bonds, double barreled bonds, tax anticipation notes, bond anticipation notes, and revenue anticipation notes.

The differences between all these kinds of munis comes down to how the issuer expects to eventually repay the bonds and make the interest payments. For instance, in the case of general obligation notes, the bond is simply backed by the "the full faith and credit" of the issuer. That means the local or state government that has issued the bond can use just about any means available to guarantee payments, including raising taxes.

Other bonds are issued with specific provisions to raise taxes or create a new tax. These are known as limited or special tax bonds. Will the project being undertaken generate revenue from tolls, sewage fees, water bills, or other services? These are revenue or industrial revenue bonds.

The key point is how the issuer of a municipal bond expects to be able to repay the bond.

Municipal bonds are usually high quality issues, since the governments that stand behind the bonds are generally not in danger of going bankrupt. At least, that's the conventional wisdom -- but there are plenty of examples that show otherwise. Just look at New York City's fiscal problems of the 1970s or, more recently, Orange County, California's brush with bankruptcy.

Some municipal bond issuers purchase insurance to guarantee that their bonds will be repaid. But who do you think actually pays for that insurance? The bondholders, in the form of a lower return. Better stick with highly-rated bonds if you're looking for protection, rather than this type of insurance.

In order to encourage taxpayers to invest in these bonds, thereby allowing cities and states to make necessary improvements, the federal government has made interest payments from muni bonds exempt from federal income taxes. Muni bonds are known as tax-free for this reason.

If reducing taxes is your goal, it gets even better. If you buy a municipal bond issued in your state, then you don't have to pay state income taxes on the interest you are paid on the bond. These bonds are double tax-free munis.

And if you buy a muni issued by the city or locality where you live, you won't have to pay local income taxes. The term to describe these is -- you guessed it -- triple tax-free. If you live someplace where the local taxes are high, like New York City, these bonds can be attractive.

The trade-off you make when you buy a municipal bond is that you receive a lower coupon rate or current yield than you'd get with a comparably-rated, similar maturity corporate bond. The tax savings are supposed to make up the difference so that in the end you could come out ahead by buying the bond with the lower yield.

Generally, muni bonds make more sense for investors in high tax brackets. Remember, however, that the payoff of saving on your tax bill might not be worth giving up the additional returns you might be able to receive from another asset class or type of bond.

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Corporate Bonds Explained

It's a fact of operating a business -- you often need money in order to grow your business, expand to new locations, upgrade equipment, or any of a thousands other uses of capital. Generally speaking, companies have three choices when they want to raise cash. They can issue shares of stock, they can borrow from the bank, or they can borrow from investors by issuing bonds.

Corporate bonds come in dozens of varieties. Many corporate bonds feature a call provision that allows the issuing company to pay back the principal to bond holders before maturity.

Other corporate bonds are known as convertibles because they carry a provision that the bond can be converted into shares of common stock under certain circumstances. Convertible bonds can be more attractive that bonds with no conversion provision, depending on the price of the underlying stock.

Most corporate bonds are fixed-rate bonds. The interest rate the corporation pays is fixed until maturity and will never change.

Some corporate bonds use floating rates to determine the exact interest rate paid to bond holders. The interest rate paid on these bonds actually changes, depending on some index, such as short-term Treasury bills or money markets. These bonds do offer protection against increases in interest rates, but the trade-off is that their yields are typically lower than those of fixed-rate securities with the same maturity.

Other corporate bonds, called zero-coupons, make no regular interest payments at all. No payments at all? Yes, but it's not a trick. These bonds sell at a deep discount to face value, and then are redeemed at the full face value at maturity. The bond holder earns interest on these bonds along the way -- it's just that it's all paid back with the principal when the bond ends.

No matter how interest payments are structured, the interest that the company will pay comes down to one factor: at what rate will investors believe the bonds are a good investment. When you buy a corporate bond, you must have faith that the company will eventually repay you, as well as make regular interest payments to you.

Rather than take the company's word for it, there are companies that specialize in evaluating corporations and other bond issuers to determine their fiscal strength. Moody's Investors Services, Fitch IBCA, and Standard & Poor's Rating Services all specialize in assigning ratings to bonds that determine the ability of their issuers to repay those bonds.

While all three of these services are available mainly to subscribers, their Web sites can help you to understand how their ratings work, and provide industry analyses and other reports.

The following are summaries of the definitions of Moody's ratings for long-term bonds.

    * Aaa - Best quality, with smallest degree of investment risk.
    * Aa - High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds.
    * A - Possess many favorable investment attributes. Considered as upper-medium-grade obligations.
    * Baa - Medium-grade obligations (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade.
    * Ba - Have speculative elements; futures are not as well-assured. Bonds rated Ba and below are generally considered speculative.
    * B - Generally lack characteristics of a desirable investment.
    * Caa - Bonds of poor standing.
    * C - Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing.

Corporate bonds usually offer higher yields than munis for two reasons. First, there is generally more risk involved with corporate bonds since companies are more likely to run into financial problems than local governments. Second, your earnings from a corporate bond are taxable (compared to the tax-free status of muni bonds).

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Inflation-Indexed Bonds

Inflation-indexed bonds give both individual and institutional investors a chance to buy a security that keeps pace with inflation.

When you buy Inflation-Indexed securities, the U.S. Treasury pays you interest on the inflation-adjusted principal amount. Competitive bidding before the security's issue determines the fixed interest or coupon rate. At maturity, the Treasury redeems your securities at their inflation-adjusted principal or par amount, whichever is greater. It issues Inflation-Indexed securities through Public Debt's TreasuryDirect system and through TRADES -- the commercial book-entry system where financial institutions or government securities brokers/dealers hold the securities on your behalf.

The securities values are periodically adjusted for inflation, and the principal you receive when they mature won't drop below the par amount at which they were originally issued. Like other Treasury securities, they're safe -- backed by the full faith and credit of the U.S. government. And, you get a tax break. Inflation-Indexed securities are exempt from state and local taxes, although federal income taxes apply.

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Junk Bonds: High Yields, High Risk

Mention junk bonds to many investors and they'll flinch at the thought of high-flying financiers of the 1980s such as Ivan Boesky and Michael Milken. There is a reason that junk bonds are so named, of course. These are the bonds that pay high yields to bondholders because they don't have any choice -- their credit ratings are less than pristine, making it difficult for them to acquire capital at an inexpensive cost. The end result for investors is that junk bonds pay high yields, but they also carry higher than average risks that the company might default on the bond.

stonehorse

thank for sharing！

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Smoothing out the Ride


WHETHER YOU are just starting your investing career or have already amassed a tidy nest egg, your portfolio needs some steady and reliable income. For younger people, that income will balance out the periodic dips in a stock-dominated asset mix; for those in retirement, it will provide money to live on.

We're talking here about a long-term investment -- a core commitment to the fixed-income arena that is unaffected by your view of the current state of the bond market or inflation. The strategy is to buy and hold your bonds until maturity, so the foundation should be safe, liquid government bonds -- in particular, intermediate-term Treasurys (those that mature in two to 10 years).

Why not long-term bonds? Because as it turns out, long bonds actually underperform intermediates on a buy-and-hold basis. Using data spanning the past 30 years from investment-research firm Ibbotson Associates, SmartMoney calculated that over a 10-year holding period, a portfolio of Treasury notes with a constant average maturity of five years outperformed a portfolio of 20-year bonds (the standard benchmark back in the 1960s). The five-year notes returned 8.5% averaged annually, while the 20-year bonds returned 8%. In addition, intermediate notes are roughly half as volatile as long bonds. And in terms of balancing your overall portfolio, intermediates are less closely correlated to the ups and downs of the stock market.

Treasury Direct
If you are just starting out, you can simply buy five-year Treasurys, or -- if you have a lot of assets allocated for bonds -- you can put together a so-called ladder of Treasurys. Either way, your best bet for buying bonds is the government's commission-free Treasury Direct program, which allows you to bypass brokers and their fees. An application to open an account may be obtained online by linking to the New York Federal Reserve's Web site or by contacting your nearest Federal Reserve Bank. You can also call the U.S. Bureau of Public Debt at 202-874-4000.

Two- and three-year notes are available for a $5,000 minimum investment, while five- and 10-year notes have $1,000 minimums. You can set up an account online. If for some reason you need to sell the Treasurys in this account before they mature, you will have to have them transferred to a broker, who will charge at least $50 per transaction. In addition, Treasury Direct accounts of $100,000 or more face an annual $25 maintenance fee.

Agency Bonds
Also extremely safe and liquid, but offering a slightly higher yield, are government-agency bonds issued by the likes of the Tennessee Valley Authority, Farm Credit Financial Assistance Corp., the Federal National Mortgage Association and the Government National Mortgage Association. (These debentures should not be confused with the mortgage-backed bonds that are also issued by FNMA and GNMA; mortgage-backed securities are extremely sensitive to fluctuations in interest rates and should be avoided.)

It's hard, however, to gain any edge with these bonds over Treasurys. That's because they're generally available only through brokers and thus incur commission costs that cut into their yield. How much? The standard retail brokerage fee comes out to 0.5%, or, in the lingo of the bond world, 50 basis points. Even if you have $100,000 to invest and negotiate a lower commission, perhaps 20 basis points, the advantage over Treasurys will probably come to only around $50 a year.

The exception is if you have a very large portfolio and can sink perhaps $1 million into agency bonds; you might then be able to get the institutional-commission rate of just 10 basis points. Or, at a more modest level, you might be able to hook up with a financial adviser who specializes in making bulk government-agency-bond purchases directly from banks, lumping clients' investments together in order to build million-dollar packages of agency debentures.

Muni Bonds?
Investors with substantial income should also consider combining tax-free municipal bonds with their Treasurys. While the stated yields of munis are lower than those of Treasurys, the effective return for investors in high tax brackets is almost always better. As with treasurys, individual muni bonds can also be laddered to limit your interest-rate exposure. But because they tend to trade in fairly large lots (usually $25,000) and because, as a precaution against default risk, investors should spread their money among a variety of different locales, building a muni portfolio requires a commitment of $100,000 at a bare minimum.

If you don't have enough now to build a muni ladder, the next best option is to look to a series of municipal-bond mutual funds. The best are Vanguard's Municipal Limited-Term and Intermediate-Term funds (which both have a minimum initial investment of $3,000; call 800-662-7447 for information). They maintain a low 0.22% expense ratio and are run with minimal maturity fluctuation and risk-taking.

What About Corporates?
While investors have traditionally been steered to these vehicles because they offer higher interest income than government bonds, we are dubious about endorsing them. In part, it's a question of costs eating into those higher yields. First there are the taxes: Income from corporates is fully taxed at all levels. If your state and local rates (which are not applicable to government bonds) are a mere 6%, that would cut the effective return of an 8% yield to 7.5%. Next come the transaction costs: both brokerage commissions and the cut taken by the bond dealers (known as the spread). All told, they can easily eat up 1% or more of your investment.

Perhaps most important, though, is that the best bonds are usually callable by the issuer, meaning the corporation can, at its discretion, pay off its obligation at a stated price and stop paying interest. That becomes a heads-you-win, tails-I-lose proposition for investors. If interest rates decline and the value of the bonds goes up, the corporation may call them, disrupting your expected income stream and cutting off a potential capital gain. Meanwhile, if interest rates rise, you are stuck holding a less valuable security that is yielding below-market rates.

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Bond Laddering

One popular way that investors can help to balance risk and return in a bond portfolio is to use a technique called laddering. Building a laddered portfolio means that you buy a collection of bonds with different maturities spread out over your investment time frame. For instance, in a ten-year laddered portfolio, you might purchase bonds that mature in 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 years. When the first bond matures in a year, you'd reinvest in a bond that matures in ten years, thereby preserving the ladder (and so on for each year). The rationale behind laddering isn't complicated. When you buy bonds with short-term maturities, you have a high degree of stability -- but because these bonds are not very sensitive to changing interest rates, you have to accept a lower yield. When you buy bonds with long-term maturities, you can receive a higher yield, but you must also accept the risk that the prices of the bonds might change. With a laddered portfolio, you would realize greater returns than from holding only short-term bonds, but with lower risk than holding only long-term bonds. By spreading out the maturities of your portfolio, you get protection from interest rate changes. If rates fell by the time you need to reinvest, you'd have to buy a bond with a lower return, but the rest of your portfolio would be generating above-market returns. If rates increased, you might receive a below-market return on your portfolio, but you could start to take care of that the next time one of your laddered bonds matures.

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Bonds vs. Bond Funds

BONDS ARE COMPLEX -- there's no doubt about it -- especially if you're a novice investor with little experience in the markets. That's why a lot of people opt for bond funds when they seek to diversify their investments with some fixed-income exposure. Our view is that if you're willing to put in the effort, you're better off buying individual bonds instead of bond funds. But in the real world, a fund is sometimes worth the convenience.

Here's what you have to consider:

Like an equity mutual fund, a bond fund is managed by a professional investor who buys a portfolio of securities and makes all the decisions. Most funds buy bonds of a specific type, maturity and risk profile -- 15 year corporates, for instance, or tax-free municipals -- and pay out a coupon to investors -- often monthly, rather than annually or semiannually like a regular bond.

The chief advantage of a bond fund is that it's convenient. It's also true that when it comes to buying corporate and municipal bonds, a professional manager backed by a strong research organization can make better decisions than the average individual investor. Consequently, if you want to dabble in junk bonds or shelter your income with triple-tax-free New York City 30-year bonds, you may be better off going the easy route and picking a good fund.

The disadvantage of a bond fund is that it's not a bond. It has neither a fixed yield nor a contractual obligation to give investors back their principal at some later maturity date -- the two key characteristics of individual bonds. Then there are the fees and expenses that can cut into returns. Finally, because fund managers constantly trade their positions, the risk-return profile of a bond-fund investment is continually changing: Unlike an actual bond, whose risk level declines the longer it is held by an investor, a fund can increase or decrease its risk exposure at the whim of the manager.

The other thing about building your own portfolio of bonds is that you can tailor it to meet your circumstances, meaning the bonds will mature precisely when you need them. A bond fund cannot deliver that sort of precision.

Our advice is this: If you lack the time or interest to manage a bond portfolio on your own -- or if you want a mixed portfolio of corporates or municipals -- buy a bond fund. But if you want a tailored portfolio of Treasurys to mature when your kid goes to college -- and you want to avoid the fees and added risk associated with bond funds -- go ahead and take the plunge.

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I Savings Bonds

http://www.treasurydirect.gov/in ... d_ibonds_glance.htm

I Bonds are a low-risk, liquid savings product. While you own them they earn interest and protect you from inflation. You may purchase I Bonds via TreasuryDirect, at most local financial institutions or through payroll deduction. As a TreasuryDirect account holder, you can purchase, manage, and redeem I Bonds directly from your Web browser.

Buying I Bonds through TreasuryDirect:

    * Sold at face value; you pay $50 for a $50 bond.
    * Purchased in amounts of $25 or more, to the penny.
    * $5,000 maximum purchase in one calendar year.
    * Issued electronically to your designated account.

Buying Paper I Bonds:

    * Sold at face value; i.e., you pay $50 for a $50 bond.
    * Purchased in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000.
    * $5,000 maximum purchase in one calendar year.
    * Issued as paper bond certificates.

It is non-marketable - cannot be bought or sold in secondary securities market. Registered in names of individuals and some entities, including trusts, estates, corporations, partnerships, etc.

I Bonds have a two-part interest rate. The first is a fixed rate that is set when you buy the bond. The second rate is variable and tied to the Consumer Price Index for Urban consumers. This rate changes twice a year according to changes in the CPI-U.

Current Rate:          3.36% through April 30, 2010
Minimum purchase:         $50 for a $50 I Bond when purchasing
Maximum purchase(per calendar year):         $5,000 in TreasuryDirect and $5,000 in paper bonds
Denominations:         Paper bonds: $50, $75, $100, $200, $500, $1,000, and $5,000

Redemption Information:

    * Minimum term of ownership: 1 year
    * Interest-earning period: 30 years
    * Early redemption penalties:
          o Before 5 years, forfeit 3 most recent months' interest
          o After 5 years, no penalty

Tax Considerations

    * Interest earnings are exempt from State and local income taxes, but are subject to State and local estate, inheritance, gift, and other excise taxes.
    * Interest earnings are subject to Federal income tax.
    * Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions).

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More on I bonds

What Happens in Deflation?

If we should enter a deflationary environment, the variable interest rate would be negative so your bond would not increase in value.
However, the I Bond would never fall below its face value regardless of the rate of deflation.

Are I Bonds for Everyone?
I Bonds work best in taxable accounts for investors looking for alternative savings vehicles.

There are other ways to protect against inflation (stocks, for example), however this is one of the few guaranteed savings instruments that is inflation protected and doesn’t generate a current tax liability.

High-income investors should note that I Bonds might not be your best choice in periods of high inflation. If the fixed portion of the interest payment is not enough to pay the taxes due, you could lose some of the inflation protection aspect of the bond. For example:

If you owned an I Bond with a fixed interest rate of 2.5% and a CPI-U adjusted rate of 6%, your income would be $850 ($10,000 x 0.085 = $850) and taxes about $300 ($850 x 0.35 = $297.50), giving you after-tax income of $550.

However, to keep up with inflation you needed to net $600 ($10,000 x 0.06 = $600). The fixed interest portion of the I Bond was not high enough to cover the taxes owed, so you lost part of the inflation protection.

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Treasury Inflation-Protected Securities (TIPS)

http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

You can buy TIPS from us in TreasuryDirect and Legacy Treasury Direct through non-competitive bidding. Starting in January 2007, the 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect.

You also can purchase TIPS through banks and brokers through either competitive or non-competitive bidding.

Use TIPS to:
    * Diversify your investment portfolio
    * Supplement retirement income

Rates & Terms
    * TIPS are issued in terms of 5, 10, and 20 years. The 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect.
    * TIPS Inflation Index Ratios can be used to easily calculate the inflation adjustment to principal on previously issued TIPS.
    * TIPS can be held until maturity or sold before maturity.

Redemption Information
    * Minimum Term of Ownership: None
    * Interest Earning Period: To maturity

Tax Considerations
    * Interest income and growth in principal are exempt from state and local income taxes.
    * Interest income and growth in principal are subject to federal income tax.

The most recent TIPS Auction is the 20 year TIPS with Maturity Date on 01-15-2029. The rate is 2.5%. Better than all of the saving's account and money market rates. (1.79% most from Bankrate.com as of today, 11/07/09). And it's inflation protected which means your get extra interests and principle if inflation happens.

Treasury Inflation-Protected Securities, also known as TIPS, are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater.

TIPS pay interest every six months, based on a fixed rate applied to the adjusted principal. Each interest payment is calculated by multiplying the adjusted principal by one-half the interest rate. Follow the links below to view detailed data on the CPI numbers for various time periods:

http://www.treasurydirect.gov/in ... tipscpi/tipscpi.htm

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Comparison of TIPS and Series I Savings Bonds

	TIPS	I-Bonds
Type of Investment	Marketable--can be bought and sold in the secondary securities market	Non-marketable - cannot be bought or sold in secondary securities market. Registered in names of individuals and some entities, including trusts, estates, corporations, partnerships, etc. See Learn More about Entity Accounts for full information on the entity registration types.
How to buy	At auction through TreasuryDirect, Legacy Treasury Direct, or through banks, brokers, and dealers. Starting in January 2007, 20-year TIPS are no longer available in Legacy Treasury Direct, but are available in TreasuryDirect.	Electronic: Anytime online from TreasuryDirect. Paper: most banks, credit unions, or savings institutions.
Purchase Limits	Auction: Non-competitive bidding:up to $5 million - Competitive bidding - up to 35% of offering amount	Electronic: $5,000 per Social Security number per calendar year. Paper: $5,000 per Social Security number per calendar year.
Par Amount/Face Amount	Minimum purchase is $100. Increments of $100.	Electronic: purchased in amounts $25 or more, to the penny; Paper: Offered in 7 denominations ($50, $75, $100, $200, $500, $1,000, and $5,000).
Inflation Indexing	Inflation adjustments measured by CPI-U published monthly	Semiannual inflation rate (based on CPI-U changes) announced in May and November.
Discounts/ Face Amount	Price and interest determined at auction.	Electronic I Bonds - purchased in amounts of $25 or more, to the penny. Paper bonds issued at face amount (A $100 I-Bond costs $100.)
Earnings Rates	Principal increases/decreases with inflation/deflation. Interest calculations are based upon adjusted principal. Fixed interest rate.	Earnings rate is a combination of the fixed rate of return, set at the time of purchase, and a variable semiannual inflation rate.
Interest	Semiannual interest payments are based on the interest rate set at auction. Inflation-adjusted principal is used to calculate the  interest amount	Interest accrues over the life of the bond and is paid upon redemption
Tax Issues	Semiannual interest payments and inflation adjustments that increase the principal are subject to federal tax in the year that they occur, but are exempt from state and local income taxes.	Tax reporting of interest can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first. Interest is subject to federal income tax, but exempt from state and local income taxes. Interest can also be claimed annually.
Life Span	TIPS are issued in terms of 5, 10, and 20 years.	Earn interest for up to 30 years.
Disposal before maturity	Can be sold prior to maturity in the secondary market.	Redeemable after 12 months with three months interest penalty. No penalty after 5 years.

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Leveraged loans

http://seekingalpha.com/article/ ... -loan-cefs-to-watch

Vulture investors in fixed income securities are mainly hedge funds and other institutional investors. However, there will soon be some good opportunities for retail investors in leverage loan closed end funds.

Leveraged loans are unregistered loans made by banks to lower rated non-investment grade corporate borrowers. These are typically longer term loans with floating rates spread above LIBOR. In some ways, they are similar to high yield bonds, and some non-investment grade corporate borrowers use both leveraged loans and high yield bonds. But there are some important differences:

    * Leveraged loans are more senior in the capital structure and are secured. They are structured to include a lien against assets which can be sold off or operated for cash. High yield bonds are senior unsecured and are behind loans in the pecking order when there is a default.

    * Leveraged loans are floating rate, high yield bonds are fixed rate.

    * Effective duration of leveraged loans is shorter. Much less interest rate risk.

    * Leveraged loans have strong covenants which are minimal for high yield bonds.

    * Default recovery rates for leveraged loans are about 80% versus 30-40% for high yield bonds.


In spite of many advantages, leveraged loans have recently dropped significantly in price because of the credit liquidity crunch- not because of any problems with the underlying securities. Open end mutual funds that invest in leveraged loans have experienced 18 straight weeks of fund redemptions which means forced selling.

To make things worse, several hedge funds have recently been forced to unwind total return swaps [TRS] financing programs. TRS lines are used by hedge funds and market value CLO obligations to borrow from banks to buy debt instruments such as leveraged loans in the open market. Market value CLOs (unlike cash flow CLOs) must mark to market their underlying loan assets at the end of each day. As the price of leveraged loans has fallen, investors using TRS financing face repayment similar to a margin call. Some irresponsible hedge funds and CLOs have used leverage of 400% up to as high as 1000%.

Once the market stabilizes, a good way for retail investors to buy leveraged loans is to use closed end funds selling at a discount to NAV. That way you get a discount on assets that are already heavily discounted by forced selling.

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One chart for the leverage loan fund:

Pioneer Floating Rate Trust (PHD)

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Fund screener:

http://www.cefconnect.com/Screener/FundScreener.aspx
http://screen.yahoo.com/bonds.html