What exactly is a bond? How do they make money?
I thought bonds were a non-risk investment. Why are the bond funds in my 401K volatile?
Why is it so difficult to find information online about specific bond funds like you can about stock funds?
Bonds pay interest, or at least they are supposed to.
The interest rate may be fixed or variable. If a bond is for a long term and a fixed rate, the market value can fluctuate widely and quickly should overall interest rates changes.
US government bonds are considered the risk-free standard in regard to eventually getting your money back. There still could be rate risk. Bonds issued by companies may be close to risk-free, or be so risky as to be simply a gamble.
So there’s two kinds of risk - rate risk and the risk of the bond will be redeemed.
The prices of many bonds are listed in the WSJ or Barron’s and you may be able to find additional information thru a broker. I don’t know a good on-line source.
Link:
What exactly is a bond?
A bond is basically an IOU from a company, municipality, etc. If such an organization wants to raise money they can do so by offering to pay you a certain amount of interest over a given period of time. An example would be if XYS inc. offered to pay you 6% annual interest in exchange for using your $1,000 for 1 year (the maturity date). You cough up the bread, they give you a piece of paper containing the terms of the agreement.
For the record, interest paid on municipal bonds is federal income tax FREE. The interest rate is typically lower, maybe 4%, but in light of the fact that Uncle Sam is gonna gank 30% of the 6% noted above yielding you, what…3.6%?
To quote Alardyce T Merriwether: “Life contains a particle of risk.”
Arguably ANY investment involves risk. The degree of risk with bonds is, like any IOU, related to the odds that you’ll get your money back. Low risk bonds, such as US Savings bonds, are promises given to you by the US Government–a rather powerful financial institution–so you can be reasonably assured that you’ll be able to cash them in when you’re ready. Higher risk bonds (aka: junk bonds) are issued by “less sound” entities. Let’s say Matchka Enterprises (ME) wants to raise money to fund research on Scalar Weapons. One way to do this is to issue stock, which would suck because then ME would have to share the immense profits of the successful product. Another way ME can get the money is to sell bonds: “Given these troubled times, ME feels it appropriate to offer you 8% interest (ME really wants to raise the capital) over a 3 year term in exchange for the use of your money.” You get the idea.
Many companies offer stocks as well as bonds. The reason bonds are considered “safe” as investments go is the order in which an organization has to pay its debts. Bonds get paid first because they are a contract. Stocks get paid last, if at all, if a company (ENRON) goes belly up because stock-holders are literally part owners of the dead company.
The “volatile” bonds in your 401k are probably purchased from relatively aggressively developing companies. They present less attractive risk and so must pay a better interest. As 401k accounts go, you’re probably OK because ususally the funds are invested in a “bond mutual fund.”
Mutual Funds Rock.
zwaldd –
Caudio’s link (above) also has a section discussing the difference between an individual bond and a bond fund – different animals, but the theory is the same (when interest rates rise value goes down, etc.).
Also, there should be no reason why you cannot get info on line concerning your bond funds (so long as they are mutual funds). How do you access info about the stock funds? If you use the website of the fund issuer (Vanguard, Fidelity, Dreyfus, or whomever), all of their funds should be there – whether equity funds, bond funds, “balanced funds” etc. If they are not, contact the fund issuer (or your plan administrator) and ask why.
On the other hand, if they are not mutual funds, but rather are simply investment portfolios managed by some investment manager hired by the plan, then there may be no online source available to you between statements.
Excellent link…explained things very well, thanks. Regarding the online info, with stock funds I can go to many different sites, Yahoo for example, enter a company name or code, and see a performance history of actual stock value. At the Fidelity site where I track my 401K, I can see percentage returns for 1 month, 3 months, a year, five years, etc. , but I can’t see stats showing the actual value trend, i.e., during what periods was there growth? What periods showed loss?