Shaken not stirred, isn’t that the way you like them, James? Ah well, then I suppose you’d best start here. I know, all that financial terminology and who can really trust Wikipedia? But what are we to do, trust the trading firm who wants us to buy into the bond market with them? No, you are right, James, we need to prepare ourselves for this adventure into the vast world of credit.
A bond is a so-called debt security. The issuer gaurantees that you will be repaid your principal plus interest at maturity. Unless, of course, the issuer goes bankrupt in which case you get in line like all the other lenders.
There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds.
Oh, I realize, James, that you have no fear that you will get your money. After all, you do have your ways. Meanwhile, with interest rates at the Fed hovering at zero and the stock market fluttering and fluctuating minute by minute, bonds do seem the way to go. Still . . .
At bondsonline.com, reporter Katie Brenner gives us this estimate:
(Fortune Magazine) — You count on bonds to be the quiet part of your portfolio, providing steady returns and offsetting the volatility of your stock holdings. Many retired investors count on bonds for regular income. Lately, though, the bond market has been anything but calm. The subprime-mortgage meltdown has roiled the credit markets and slowed the economy. In response, the Federal Reserve has cut short-term interest rates, helping to push yields to near-historic lows.
And James, please don’t forget about the inflation factor. With the Fed rate going low and prices on the rise, you may need to pull out your trusty submarine to survive the tide.
‘Til tomorrow, then.