The Basics of Investing in Bonds

Interest Rate. While most bonds pay a rate of interest that remains fixed until maturity, bonds may also be structured to have floating a floating rate of interest, or to have all interest payable at maturity. Typically, interest is paid semiannually.

Example: You invest in a $1,000 bond with an interest rate of 6% and a 10-year maturity. You will earn $60 in interest each year, payable in two increments of $30 each. At the end of the 10-year period, you will be repaid the full principal amount of your investment - $1,000

Maturity. Bonds are typically issued for a specific period of time and are often categorized by the length of their maturity – the time at which the investor is repaid the full principal amount of the investment:

• Short-term notes: maturities of up to five years
• Intermediate notes/bonds: maturities of five to 12 years
• Long-term bonds: maturities of 12 or more years

Early redemption features. In certain cases your bond may be structured to have a potential life that is less that its maturity:

• Callable Bonds – Callable bonds have a provision that allows the issuer to redeem or “call” the bond at a specified date prior to maturity. If a bond is called, your full principal investment is repaid, and the investor no longer receives interest payments.
• Put Features – The opposite of a callable bond, a bond with a put option allows the investor the option of requiring the issuer to repurchase the bonds at a specified time prior to maturity.

Price. The price that an investor pays for a bond is based on many factors including interet rates, supply and demand, credit quality, maturity and tax treatment of the issue. Newly issued bonds typically trade at or near their face value, known as par value. In other words, you pay $1,000 for a $1,000 bond. Bonds traded in the secondary market however will fluctuate in price based upon changes in the interest rate markets. If a bond price is greater than its face value, it is said to be trading at a premium. Bonds that sell below face value are said to be trading at a discount.

Yield. Yield is the return that you actually earn on the bond and is based on the price paid and the interest rate received.

Example: If you buy a $1,000 bond and the interest rate is 6% ($60/year), your current yield is 6% ($60 / $1,000). However if you were to purchase that same bond at a discount – let’s say you only pay $950 for it, your current yield is actually 6.31% ($60 / $950).

Tax Status. Some bonds offer special tax advantages. Interest from U.S. Treasury bonds is exempt from state and local income tax. Interest from most municipal bonds is exempt from federal income tax and in many cases, is also exempt from state and local income taxes. These bonds are frequently referred to as double-tax-exempt bonds.

Credit Quality and Ratings. The credit worthiness of a bond issue is determined through detailed research and analysis of the issuer’s financial condition and management. There are several credit rating agencies that attach a specific rating to a bond issue based on the research performed. At Ziegler, we have a team of award-winning credit analysts that maintain research on issues that are underwritten by Ziegler. These research and credit reports are available on www.ZieglerResearch.com. For more information on determining the credit quality or risks associated with a specific issue and to determine if an individual bond investment is right for you, contact your Ziegler financial advisor or our Client Service Center at 888.884.8339.

Fixed income securities are subject to market risk and interest rate risk. If sold in the secondary market prior to maturity, investors may experience a gain or loss depending on interest rates, market conditions and the credit quality of the issuer. B.C. Ziegler and Company does not provide tax or legal advice. Please consult your tax advisor regarding the suitability of these investments in your portfolio.