Government Bonds Key Terms
Learn about government bonds by reading up on these key wordsGovernment bonds offer a wide variety of risk profiles for investors. From risk-free Treasury bonds to highly risky bonds issued by foreign governments in emerging markets, government bonds can be an excellent addition to anyone’s investment portfolio. There are several terms that you must be familiar with before venturing into this world, however. The coupon paid by a bond, the bond’s price and the bond’s credit rating are all critical bits of information you’ll need before buying a bond.
Treasury Direct, a branch of the U.S. Treasury, has a good discussion of how U.S. Treasury bonds work.
Bond priceThe amount of interest the bond will pay determines the bond price along with how long the bond will last, and the current interest rates on other similar investments. The bond price is usually quoted as a percentage, so that the buyer can determine an exact price depending on the amount of bonds the buyer wants.
Fidelity Investments has a very comprehensive description of bond price and the factors that affect it.
CouponWhen you buy a bond, you receive a period payment called a coupon. A coupon is the interest paid on a bond to the bond owner. Each bond has a coupon rate, and the coupon rate tells you the cents received per dollar of bond owned. Bonds with higher coupon rates tend to command higher prices.
Check out InvestorWords.com for an easy-to-understand definition of a coupon along with definitions of terms that will help you further understand coupons.
Maturity dateUnlike stocks, almost all bonds come with a maturity date. On the maturity date, the bond owner receives the final coupon payment and the principal repayment. Bonds, when issued, typically have decades to go before the maturity date. The maturity date is important because bonds that are father from maturity are riskier investments.
The information on Investopedia about maturity date is worth looking into as well as related terms that may be helpful.
Foreign bondsA foreign bond is a bond issued by a foreign government in a foreign country. For example, if the German government issued bonds in the U.S. denominated in U.S. dollars, then that would be a foreign bond. These are risky, in that the foreign government cannot print another country's currency.
TheFreeDictionary has a very good discussion of foreign bonds.
Credit ratingA bond's credit rating is an indication of the bond's risk. Bonds with a high credit rating are less likely to go into default and bankruptcy than bonds with a low credit rating. Companies offer credit ratings based on several elements of the bond issuer, be it a company or a country.
StreetAuthority has a clear definition and a complete set of examples about credit rating.
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