Bonds Features

To complete a basic understanding of bonds, you should know about some other features of these securities. They are:

Liquidity

You can sell stocks in the equity market at market prices, generating a capital gain or loss.

Bonds can also be sold or “liquidated” (prior to maturity) at market prices in the secondary market.

The price you receive can be more or less than your original investment or maturity value, depending on a variety of factors, including the financial condition of the issuer and interest rates at the time of the sale.

Call Features

Callable bonds are structured so that a bond issuer can retire the securities at specific dates and prices prior to maturity. This is typically done during a declining interest rate environment.

However, to compensate investors for this potential early redemption, callable bonds typically offer: higher yields than noncallable bonds, call protection (the period of time in which the issuer cannot call the bond—typically one to ten years), and sometimes, a call premium (a specified amount above par when called).

Credit Quality

Many investors understand that higher yields are accompanied by an increased amount of risk. It’s important to know how much risk you are willing to tolerate to achieve your financial goals, and then determine which investments match your risk tolerance.

Knowing the credit quality of a bond can help you do this. Conservative investors favor Treasury securities because they are backed by the full faith and credit of the U.S. Government and Federal Agency securities, which offer credit quality that is second only to that of Treasuries.

AAA- rated municipal bonds are also generally regarded as high credit quality, conservative investments. Less risk averse investors looking for higher yields typically purchase corporate bonds, which are rated based on their credit quality.

The credit quality of corporate and municipal bonds are determined by an issuer’s ability to make timely payments of interest and principal to its bondholders. Below is a handy chart of the credit ratings from both Moody's and the S&P. This is kind of rare and will really come in handy for big bond investors, so you might want to bookmark this page (CTRL + D) now for ease of future finding.