A bond is an investment based on debt in either a federal or municipal government or a corporation. Depending on the issuers, bonds can cover a variety of investment amounts, time periods or interest rates. They can be either bought and held for the life of the bond, or traded between investors on a secondary market. U.S. Treasury bonds traditionally have been some of the safest and most secure bonds available, and therefore have some of the lowest yields of all bonds.
An investor that buys a bond is in essence giving a loan to the organization that issued it. Each bond is issued at a face or “par” value. Bond’s are issued with a variety of maturity dates that can range from 13 weeks to 30 years. Each bond has an interest rate, sometimes called the “coupon,” that is fixed throughout the life of the bond. A bond’s yield is measured as the total return over the life of the bond. While interest rates for the bonds are fixed, they fluctuate in the market, which alters a bond's total value over time, and thus changes its yield.
Bonds have credit ratings that are issued by financial rating companies. They include Moody’s Investor Services, Standard & Poor’s, and Fitch Ratings. The three use a similar rating system where the best creditors have a AAA rating, meaning that the bond is very likely to be honored. U.S. Treasury bonds are AAA rated and are ranked among the safest investments in the world. Bonds with lower ratings pay more interest, since investors are taking on a risk of default.
Higher interest rates result in higher yields. Bonds issued by the U.S. government, including the U.S. Treasury bills, bonds and notes, offer some of the lowest interest rates available, which is why treasury bonds are not among the class of bonds termed “high-yield” bonds. The high-interest bonds, sometimes called “junk bonds,” have ratings of BBB or lower and are usually issued by corporations or small governments.
Investors who want to invest in high-yield bonds should look beyond U.S. Treasury bonds and explore the options available on the bond market. Although treasury bonds yields won’t match those of junk bonds, treasury bonds do offer different yields depending upon the maturity dates. According to Morningstar in June 2013, three-month treasury bonds paid a yield of just 0.06 percent, but 30-year treasury bonds delivered a yield of 3.5 percent.
Investors who want higher yields from an investment in bonds without adding risky high-yield bonds to the portfolio can consider investing in government bond mutual funds or exchange-traded funds. As with bonds themselves, funds investing in corporate bonds will produce higher returns than those invested in government bonds. But according to CNN Money, bond funds fluctuate in price like other securities, and while long-term government bond funds will produce higher yields over time, their prices fluctuate more widely than short-term government bond funds that are stable, but deliver lower investment returns.
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