Three Bond Investing Concepts

Before you learn about the different types of bonds, you should understand these three general bond investing concepts.

1) Bonds are a promise to return principal (par value) at a set maturity date.

This enables you to time the return of principal to meet your future financial needs, knowing that the issuer is obligated to return your principal when you hold your bond investment to maturity.

 

2) Prior to maturity, bond values and interest rates have an inverse or opposite relationship.

In other words, when interest rates go up, the market value of a bond goes down and when interest rates go down, the market value of a bond goes up. However, as stated in concept number one, principal is to be returned when held to maturity.

 

3) In general, the longer a bond’s maturity, the higher its yield. Why?

Because longer-term bonds are exposed to more market volatility and price fluctuations prior to maturity than are shorter-term bonds. Long-term bond investors are typically compensated with higher yields in exchange for this market risk exposure.