The Federal Reserve, commensurate with its dual mandate of pursuing full employment and stable prices, has been conducting aggressive monetary policy driving interest rates to historically, low levels. This action by the Fed has resulted in large gains in bond prices. As such, most bonds are now actually trading at what is known as a "premium" ;.Premium bonds are misunderstood by the retail investor who typically focuses their attention primarily on the dollar price of the bond instead of its yield.
Bonds are normally issued in $1,000 face value increments. A relationship selling at below face value is reported to be selling at a "discount" ;.A relationship selling at its face value is reported to be selling at "par", and a connection selling for a lot more than its face value is reported to be selling at a "premium" ;.Don't confuse these terms (discount, par, premium) with degrees of quality or value. A relationship selling at reduced does certainly not ensure it is better or for that matter more costly on a member of family basis than a bond selling at par or a discount. Those terms are only used to explain the bonds current price relative to its face value. So, if the dollar price of a connection really doesn't express its' relative value, how can an investor compare bonds? That answer may lie in the bond's yield.
Yield takes into account the price, the maturity, and the coupon rate. Yield is an extremely important concept in bond investing that's typically overlooked by retail investors, who make value judgments by solely concentrating on the dollar price. premium bonds invest UK Yield is a significant tool to assess the return of 1 bond against another [other things being equal, like credit ratings, call features, and/or the maturity date]. Essentially, "yield" could be the rate of your return on your investment. Professional dealers and traders, when buying and selling bonds to one another, usually quote prices in yields not dollars; yield gives you an instantaneous research the relative value in comparison to other bonds. When taking a look at yields, here are a few useful tips to find value:
- Compare the yield of the bond you're considering to other similar investments. Bonds aren't as liquid as stocks and, often times, you'll find value by comparing.
- When evaluating various maturities of exactly the same bond, go through the incremental yield (the spread) you would be receiving by buying the longer maturity and ensure you feel it's worth the additional risk. Yields are quoted in basis points: 1 basis point is 1/100th of 1 percent; 100 basis points is corresponding to 1%. For example, if you're comparing a 15 year bond with a 30 year bond, and the 30 year bond yields only 5 basis points more, that may not be worth the additional risk.
- Higher rated bonds will often provide a lower yield, other things being equal. If you're evaluating a diminished rated bond, make certain the additional yield you would get (the spread) with the low rated bond is worth the additional risk.
- Don't get caught up in a particular maturity date. Due to the way bonds are traded, it's very possible to acquire a bond with a smaller maturity that provides less expensive, other things being equal.
- In this interest rate environment, consider buying higher coupon bonds (Premiums) which are generally more defensive should interest rates rise sooner than anticipated. But remember that if interest rates remain as is or go lower for a lengthier period of time, bonds with call features might be redeemed sooner than that which you had anticipated.
