Bonds and Interest Income
Do you borrow money? Guess what? So do companies and government. Bonds are promises to repay money that are issued by companies and governments. Do you pay the same interest rate as the guy who has billions? I'm afraid not — he pays a lot less, because he's almost sure to repay, unless like Ken Lay, he suffers from bad companions, bad advice, a bad conscience, and a bad ticker that nobody ever thought he had.
Just like people, companies and governments pay different interest rates. When companies borrow money, they're called “corporate bonds.” When governments borrow money, they're called “government bonds,” “treasuries,” or “municipal bonds.”
How do you lend money to a company or a government? They're not going to call and ask. You just buy them in the stock market, and like stocks, their values go up and down. What drives the values of bonds up or down? The financial condition of the companies and governments that owe the money.
Companies and governments have credit ratings just like people. They are rated by three main companies — Moody's, Standard & Poors, and Dun & Bradstreet. If a company or government gets a lower rating from one of these companies, two things happen: (1) the next time they borrow money, they'll have to pay higher interest, and (2) the people who are already holding bonds from these less-attractive companies or governments will have to worry a little more about getting paid back. And because of this second effect, there is a third effect — the market price of those bonds will go down.
Interestingly, there can be tax benefits to putting money into government bonds. Why? Because Congress says it's good to grease the wheels of government by allowing them to pay non-taxable interest to people who want to put their money to work in the government infrastructure, and need some tax free income. Retired people often are interested in tax free municipal bonds, but they can be a fetish. Since investing in 401Ks and IRAs can often give you all the tax benefits you need, you should study up before you get all excited about tax-free municipals.
The benefits of bonds are that the returns are steady and predictable, just like the outgoing payments you face. Also, they tend to be somewhat less volatile than stocks, because the credit ratings of large companies and governments fluctuate more slowly than the values of companies. They are also more liquid because you can sell them at close to what you bought them if you need to.
Go to>> Gold and Silver
Just like people, companies and governments pay different interest rates. When companies borrow money, they're called “corporate bonds.” When governments borrow money, they're called “government bonds,” “treasuries,” or “municipal bonds.”
How do you lend money to a company or a government? They're not going to call and ask. You just buy them in the stock market, and like stocks, their values go up and down. What drives the values of bonds up or down? The financial condition of the companies and governments that owe the money.
Companies and governments have credit ratings just like people. They are rated by three main companies — Moody's, Standard & Poors, and Dun & Bradstreet. If a company or government gets a lower rating from one of these companies, two things happen: (1) the next time they borrow money, they'll have to pay higher interest, and (2) the people who are already holding bonds from these less-attractive companies or governments will have to worry a little more about getting paid back. And because of this second effect, there is a third effect — the market price of those bonds will go down.
Interestingly, there can be tax benefits to putting money into government bonds. Why? Because Congress says it's good to grease the wheels of government by allowing them to pay non-taxable interest to people who want to put their money to work in the government infrastructure, and need some tax free income. Retired people often are interested in tax free municipal bonds, but they can be a fetish. Since investing in 401Ks and IRAs can often give you all the tax benefits you need, you should study up before you get all excited about tax-free municipals.
The benefits of bonds are that the returns are steady and predictable, just like the outgoing payments you face. Also, they tend to be somewhat less volatile than stocks, because the credit ratings of large companies and governments fluctuate more slowly than the values of companies. They are also more liquid because you can sell them at close to what you bought them if you need to.
Go to>> Gold and Silver