Understanding Bond Variations and Features

Although bonds have a nice-girl reputation as low-risk investments,
many types of bonds are as risky as any stock. Thousands
of variations are out there. Many brokers make their
living speculating and trading in bonds based on these variations
and the ever-fluctuating interest rates.

A checklist of bond features
Here are a few of the different bond features you can find by
perusing the Web:

n The credit rating of the entity issuing the bond: This
rating reflects the likelihood that the issuer will default
on the bond.

n Coupon rate: The rate of interest that the bond pays.

n When interest is paid: The interest may be paid quarterly,
semi-annually, annually, or upon maturity.

n Maturity date: This refers to the date when you get back
your original investment plus any unpaid interest.

n Whether the bond is indexed for inflation: If the bond
is indexed in this way, the bond pays an amount above
the interest to compensate for inflation.

n Premiums and discounts: These amounts reflect the
value of bonds on the secondary market due to fluctuating
interest rates.

n Call features: These features allow the issuer to pay the
bond earlier if interest rates go down. (This feature never
works in the investor’s favor.)