Earning income is an important goal for many investors, and they have often relied on bonds to help them achieve it. Today’s vast
global bond market provides investors with many opportunities to pursue attractive income at an acceptable level of risk.
Bonds are issued by governments and companies to raise capital. A bond is like an IOU. When you buy a bond, you are lending money to the issuer, who agrees to pay it back at a specific time, and in most cases, to make regular interest payments along the way. Those payments can provide a valuable source of income for investors at all stages of life.
The most common ways to think about a bond's income potential are coupon rate and yield.
- Coupon rate: This is the fixed amount an issuer promises to pay each year. The prices of bonds can rise and fall, but the coupon rate remains constant.
- Yield: This is the rate of income a bond pays based on its current market price. When a bond’s price goes up, its yield comes down, and vice versa.
Finding income in a low yield world
Right now, yields on U.S. Treasury bonds are near record lows, and this challenging environment may be forcing investors to look beyond this traditional source of income. While it is tempting to select bonds with the highest yields, investors need to remember that bonds with higher yields typically entail greater risk, include the risk of falling prices or even default. Investors who choose bonds solely for high yield may be taking on more risk than they had anticipated, so careful research is important in selecting bonds with the right risk/return balance for you.
RISK/REWARD - HOUSE STYLE RELATIONSHIP
Investors seeking higher yields may take on more risk than they anticipated.