Comparing performance of bonds

There are several different options available when it comes to investing. From retirement, to stocks, and of course investing in bonds are just a few options. When it comes to finance, a bond is a debt security in which the authorized issuer owes the holder a debt. Let's take a look at some different types of bonds, characteristics and how comparing performance of bonds can make a huge difference in your return.

Types of Bonds
Bonds are generally known as a "fixed income" security because the amount of money the bond will generate is usually fixed. It doesn't matter what happens or who the bond holder is, it will always generate the exact same amount of money. Here are a few different types of bonds:

1. Treasuries. United States government treasury bonds come in a variety of different lengths of time and maturity. The time frame for maturity can range from six months to thirty years; depending on the investor. Some different types of treasuries are notes, bills, bonds, and inflation indexed notes. Treasuries are guaranteed by the United States Government and are free of state and local taxes. They are an extremely safe investment to make.


2. Corporate bonds. A corporate bond is a bond issued by a corporate usually issued in order to raise money to expand the business. They generally carry higher interest rates than government bonds because there is always the risk that the company can go bankrupt and default on the bond.


3. State and local governments. These types of bonds are usually sold free of federal income tax on the interest paid. Investors usually pay lower interest rates, unless you are in a higher tax bracket, which could actually have a higher after-tax yield than other forms of fixed income investments.

Bond Characteristics
There are certain things you want to know about bonds before you buy one and run comparisons between them; the par value, coupon rate, and the maturity date. These and a few other simple things will help you analyze the bond and compare it to other potential investments.

• Par value is the amount of money the investor will receive once the bond has reached maturity. Par value for corporate bonds is usually about $1000 and government par values are usually higher.


• The coupon rate is the amount of interest the bondholder will receive.


• The maturity date is the date in which the bond issuer has to return the principal amount to the lender.

Comparing performance of bonds
Depending on the type and characteristics of the bond or bonds you buy will depend largely on how it performs. Some will perform much better than others; and as we have learned some perform slower than others, depending on maturity dates and par value, etc. You can compare bond funds by looking at their characteristics to help you determine which bond fund offers the best balance of risk and return for you. For example, you can compare several mutual funds by looking at characteristics like credit quality, maturity, and duration. You can also compare bond funds by analyzing tax issues.

In order to get the best return on your bond fund investment you need to know your bond types and characteristics of each. This will give you a better idea of how to compare performance of bonds.