The financial media, and sadly my own industry, love “insider speak.” Care for some liquidity premiums with your alpha? While it’s true that people often use cryptic language to show off, just as often it’s simply a case of forgetting that there are those in the world who don’t live and breathe the markets.
Perhaps no asset class is as lingo-loaded as bonds. Fixed income, rising (or falling) yields, junk bonds, Fed tightening, TIPS, spreads, mortgage-backed securities – there’s no shortage of jargon for this supposedly “boring” investment that most of us own in our portfolios.
Bonds are admittedly complicated, and it’s easy to feel intimidated or confused by what’s happening in the news. Fortunately, you don’t need to be a numbers geek to be an informed investor. So let’s get past the industry-speak and focus on what you really need to know about bonds.
What are they?
My colleague Matt Tucker regularly explores bond basics for The Blog. In short, bonds are loans that investors make to governments, companies, pools of mortgage owners or many other types of issuers. In exchange for your money, the borrower promises to pay back the principal at maturity, with regular interest payments along the way. That interest income is a bond investor’s primary source of return, although bond prices can also appreciate or decline in the marketplace.
One important concept to understand is yield, which is the annual income on a bond, based on its market price; it’s sometimes used interchangeably with “interest rates.” Matt recently took a closer look at yield when discussing yield curve basics.