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Bonds: The Unbeaten Path to Secure Investment Growth

Book Description

In "Bonds: The Unbeaten Path to Secure Investment Growth", two veteran investors expose the myth of stocks' superior investment returns and propose an all-bond portfolio as a sure-footed strategy that can ensure results. The book, an expanded and updated version of "The Money-Making Guide to Bonds", is designed to educate novice and sophisticated investors alike and serve as a tool for financial advisers as well. It explains why bonds can be the right choice and how to use them to achieve financial goals. It presents a broad spectrum of bond-investment options, describes how to purchase bonds at the best price, and, most important, shows how to make money with bonds.

The wealthiest investors and financial advisers use the bond strategies outlined in this book to maximize the the return on their portfolios while providing security of principal. The strategies can help you determine how to use bonds in your portfolio and take control of your financial destiny. You'll be playing it smart while playing it safe.

Earn 15 hours of credit toward your CFP Board requirement.

Table of Contents

  1. Copyright
  2. Praise For Bonds: The Unbeaten Path to Secure Investment Growth by Hildy Richelson and Stan Richelson
  3. FOREWORD
  4. PREFACE
  5. ACKNOWLEDGMENTS
  6. INTRODUCTION
  7. I. CLEARING THE COBWEBS
    1. 1. BONDS The Better Investment
      1. 1.1. Individual and Institutional Investors: How They Differ
        1. 1.1.1. INSTITUTIONAL BOND INVESTORS
      2. 1.2. Examining the Myths
        1. 1.2.1. HISTORICAL ANNUAL RETURN
        2. 1.2.2. UNHAPPY RETURNS: UNCOVERING THE TRUE COST OF STOCK INVESTMENTS
        3. 1.2.3. TAXES, COSTS, AND RISKS OF INVESTING IN BONDS
        4. 1.2.4. PAST PERFORMANCE
        5. 1.2.5. RISK
        6. 1.2.6. GROWTH AND INCOME
      3. 1.3. A Second Look at Risks and Returns
      4. 1.4. Stock Market Volatility: The Impact on Retirement Planning
      5. 1.5. Why Bonds Are a Better Investment Than Stocks
        1. 1.5.1. QUESTIONS TO PONDER
    2. 2. THE ALL-BOND PORTFOLIO
      1. 2.1. Advantages of the All-Bond Portfolio
        1. 2.1.1. FINANCIAL PLANNING
      2. 2.2. Designing the All-Bond Portfolio
        1. 2.2.1. PLAIN-VANILLA BONDS
        2. 2.2.2. PLAIN-VANILLA EXCLUSIONS
      3. 2.3. A Word About Other Bonds
        1. 2.3.1. HIGH-YIELD DEBT
      4. 2.4. The All-Bond Antidote to greed and Fear
    3. 3. ADOPTING THE ALL-BOND PORTFOLIO A Case Study
      1. 3.1. A Poor-Fitting Portfolio
        1. 3.1.1. PETER'S FINANCIAL OBJECTIVES
        2. 3.1.2. PETER'S CONCERNS ABOUT HIS PORTFOLIO
      2. 3.2. A Consultation with Stan Richelson
      3. 3.3. A Financial Plan Aligned with Objectives
        1. 3.3.1. STEP 1: PETER'S OBJECTIVES AND FINANCIAL NEEDS
        2. 3.3.2. STEP 2: ALLOCATION BETWEEN SAFE BONDS AND ALL OTHER ASSETS
        3. 3.3.3. STEP 3: TAX REVIEW
        4. 3.3.4. STEP 4: A GOAL-DIRECTED PORTFOLIO
        5. 3.3.5. REACHING A COMFORT LEVEL
  8. II. BOND BASICS
    1. 4. THE EVOLUTION OF A BOND From Verbal IOU to Electronic Entry
      1. 4.1. Learning the Language
      2. 4.2. Bonds: The Early Years
      3. 4.3. A Colonial Debut
      4. 4.4. After the American Revolution
      5. 4.5. Entering the Twentieth Century
      6. 4.6. Changes in the Twentieth Century
      7. 4.7. A Modern Metamorphosis
    2. 5. THE LIFE OF A BOND How It's Created, Issued, Priced, and Traded
      1. 5.1. By Way of Background
      2. 5.2. Preparing a Bond issue
        1. 5.2.1. RATING A BOND
        2. 5.2.2. SETTING A COUPON RATE
        3. 5.2.3. LAUNCHING A BOND
      3. 5.3. Understanding Risk
      4. 5.4. A Bond's Cost and Yield
        1. 5.4.1. DETERMINING A BOND'S YIELD
        2. 5.4.2. CURRENT YIELD
        3. 5.4.3. SIMPLE AND COMPOUND INTEREST
        4. 5.4.4. YIELD-TO-MATURITY
        5. 5.4.5. YIELD-TO-CALL AND YIELD-TO-WORST
        6. 5.4.6. YIELD-TO-AVERAGE LIFE
        7. 5.4.7. DURATION
      5. 5.5. Total Return
      6. 5.6. Cash Flow upon Death: The estate Feature
        1. 5.6.1. PRICING A SECONDARY MARKET BOND
  9. III. BOND CATEGORIES
    1. 6. U.S. TREASURY SECURITIES
      1. 6.1. The Big Picture
      2. 6.2. U.S. Treasury Notes and Bonds
        1. 6.2.1. ADVANTAGES
        2. 6.2.2. RISKS
        3. 6.2.3. TAX IMPLICATIONS
        4. 6.2.4. PRICING INFORMATION
        5. 6.2.5. SPECIAL FEATURES AND TIPS
      3. 6.3. U.S. Treasury Bills
        1. 6.3.1. ADVANTAGES
        2. 6.3.2. RISKS
        3. 6.3.3. TAX IMPLICATIONS
        4. 6.3.4. PRICING INFORMATION
      4. 6.4. STRIPS
        1. 6.4.1. ADVANTAGES
        2. 6.4.2. RISKS
        3. 6.4.3. TAX IMPLICATIONS
        4. 6.4.4. PRICING INFORMATION
      5. 6.5. TIPS
        1. 6.5.1. ADVANTAGES
        2. 6.5.2. RISKS
        3. 6.5.3. TAX IMPLICATIONS
        4. 6.5.4. SPECIAL FEATURES AND TIPS
      6. 6.6. Key Questions to Ask About All Treasury Securities
    2. 7. U.S. SAVINGS BONDS
      1. 7.1. Simple Investments, With a Few Complexities
        1. 7.1.1. PURCHASING A SAVINGS BOND
      2. 7.2. Series EE Savings Bonds
        1. 7.2.1. EE BONDS PURCHASED ON OR AFTER MAY 1, 2005
        2. 7.2.2. SPECIAL RULES FOR OLD EE BONDS
        3. 7.2.3. ADVANTAGES
        4. 7.2.4. RISKS
        5. 7.2.5. TAX IMPLICATIONS
        6. 7.2.6. SPECIAL FEATURES
        7. 7.2.7. RECOMMENDATIONS AND TIPS
      3. 7.3. Series HH Savings Bonds
        1. 7.3.1. ADVANTAGES
        2. 7.3.2. RISKS
        3. 7.3.3. TAX IMPLICATIONS
      4. 7.4. Series I Savings Bonds
        1. 7.4.1. ADVANTAGES
        2. 7.4.2. RISKS
        3. 7.4.3. TAX IMPLICATIONS
        4. 7.4.4. RECOMMENDATIONS AND TIPS
      5. 7.5. Key Questions to Ask About Savings Bonds
    3. 8. U.S. AGENCY DEBT
      1. 8.1. Major Debt-Issuing Agencies
        1. 8.1.1. FANNIE MAE AND FREDDIE MAC
        2. 8.1.2. FEDERAL FARM CREDIT SYSTEM
        3. 8.1.3. FEDERAL HOME LOAN BANK SYSTEM
        4. 8.1.4. FINANCING CORPORATION
        5. 8.1.5. RESOLUTION FUNDING CORPORATION
        6. 8.1.6. TENNESSEE VALLEY AUTHORITY
        7. 8.1.7. FEDERAL AGRICULTURAL MORTGAGE CORPORATION
        8. 8.1.8. STUDENT LOAN MARKETING ASSOCIATION
        9. 8.1.9. ADVANTAGES
        10. 8.1.10. RISKS
        11. 8.1.11. TAX IMPLICATIONS
        12. 8.1.12. SPECIAL FEATURES AND TIPS
      2. 8.2. Key Questions to Ask About Agency Bonds
    4. 9. U.S. AGENCY and Other MORTGAGE-BACKED SECURITIES
      1. 9.1. A Complex Structure
      2. 9.2. The Agencies
      3. 9.3. Mortgage-Backed Securities
        1. 9.3.1. ADVANTAGES
        2. 9.3.2. RISKS
        3. 9.3.3. TAX IMPLICATIONS
        4. 9.3.4. SPECIAL FEATURES AND TIPS
      4. 9.4. Key Questions to Ask About Mortgage-Backed Securities
      5. 9.5. Collateralized Mortgage Obligations
        1. 9.5.1. CMO: A CLOSER LOOK
        2. 9.5.2. ADVANTAGES
        3. 9.5.3. RISKS
        4. 9.5.4. TAX IMPLICATIONS
        5. 9.5.5. PRICING INFORMATION
      6. 9.6. Key Questions to Ask About CMOs
    5. 10. MUNICIPAL BONDS
      1. 10.1. Munis: The Opaque Market
      2. 10.2. Risks
        1. 10.2.1. RISKS IN COMMON
      3. 10.3. Ratings and Other Security Enhancements
        1. 10.3.1. SECONDARY MARKET
        2. 10.3.2. INFLATION-LINKED BONDS
      4. 10.4. Purchasing Municipal Bonds
      5. 10.5. Taxes on Municipal Bonds
      6. 10.6. Tax-Exempt or Taxable Bonds: How to Decide
      7. 10.7. Taxable Municipal Bonds
        1. 10.7.1. ADVANTAGES
        2. 10.7.2. RISKS
        3. 10.7.3. TAX IMPLICATIONS
        4. 10.7.4. SPECIAL FEATURES AND TIPS
      8. 10.8. Private Activity Bonds
        1. 10.8.1. ADVANTAGES
        2. 10.8.2. RISKS
        3. 10.8.3. TAX IMPLICATIONS
      9. 10.9. Tax-Exempt Bonds
        1. 10.9.1. GENERAL OBLIGATION BONDS
        2. 10.9.2. REVENUE BONDS
        3. 10.9.3. TYPES OF REVENUE BONDS
      10. 10.10. Checking Prices on Municipal Bonds
      11. 10.11. Key Questions to Ask About Municipal Bonds
    6. 11. CORPORATE BONDS
      1. 11.1. The Big Picture
        1. 11.1.1. RATINGS
        2. 11.1.2. INTEREST RATES
        3. 11.1.3. TAXATION
      2. 11.2. Key Categories of Corporate Bonds
        1. 11.2.1. ADVANTAGES
        2. 11.2.2. RISKS
        3. 11.2.3. PRICING INFORMATION
        4. 11.2.4. SPECIAL FEATURES AND TIPS
      3. 11.3. Corporate Medium-Term Notes
        1. 11.3.1. ADVANTAGES
        2. 11.3.2. RISKS
        3. 11.3.3. PRICING INFORMATION
        4. 11.3.4. SPECIAL FEATURES AND TIPS
      4. 11.4. Corporate Retail Notes
        1. 11.4.1. ADVANTAGES
        2. 11.4.2. RISKS
        3. 11.4.3. PRICING INFORMATION
        4. 11.4.4. INFORMATION SOURCES
        5. 11.4.5. SPECIAL FEATURES AND TIPS
      5. 11.5. Corporate High-Yield Junk Bonds
        1. 11.5.1. A ROSE BY ANY OTHER NAME
        2. 11.5.2. THE TRACK RECORD
        3. 11.5.3. BRAVE BUYERS
        4. 11.5.4. ADVANTAGES
        5. 11.5.5. RISKS
        6. 11.5.6. PRICING INFORMATION
        7. 11.5.7. SPECIAL FEATURES AND TIPS
        8. 11.5.8. CORPORATE CONVERTIBLE BONDS
        9. 11.5.9. ADVANTAGES
        10. 11.5.10. RISKS
        11. 11.5.11. PRICING INFORMATION
        12. 11.5.12. SPECIAL FEATURES AND TIPS
      6. 11.6. Price-Checking Corporate Bonds
      7. 11.7. Key Questions to Ask When You're Buying Corporate Bonds
    7. 12. BOND LOOK-ALIKES
      1. 12.1. Certificates of Deposit
        1. 12.1.1. RATINGS
        2. 12.1.2. YIELDS
        3. 12.1.3. BANK CERTIFICATES OF DEPOSIT
        4. 12.1.4. BROKER-SOLD BANK CERTIFICATES OF DEPOSIT
      2. 12.2. Key Questions You Should Ask When Buying a Certificate of Deposit
      3. 12.3. Single-Premium Immediate Fixed Annuities
        1. 12.3.1. ADVANTAGES
        2. 12.3.2. RISKS
        3. 12.3.3. TAX IMPLICATIONS
        4. 12.3.4. PRICING INFORMATION
        5. 12.3.5. INFORMATION SOURCES
        6. 12.3.6. SPECIAL FEATURES AND TIPS
      4. 12.4. Key Questions You Should Ask About an Immediate Fixed Annuity
      5. 12.5. Deferred Fixed Annuities
        1. 12.5.1. INVESTMENT PHASE
        2. 12.5.2. ACCUMULATION PHASE
        3. 12.5.3. NONFIXED DISTRIBUTION PHASE
        4. 12.5.4. FIXED DISTRIBUTION PHASE
        5. 12.5.5. ADVANTAGES
        6. 12.5.6. RISKS
        7. 12.5.7. TAX IMPLICATIONS
        8. 12.5.8. PRICING INFORMATION
        9. 12.5.9. SPECIAL FEATURES AND TIPS
      6. 12.6. Key Questions to Ask About a Deferred Annuity
      7. 12.7. Nonconvertible Fixed-Rate Preferred Stock
        1. 12.7.1. PREFERRED HYBRIDS
        2. 12.7.2. ADVANTAGES
        3. 12.7.3. RISKS
        4. 12.7.4. PRICING
        5. 12.7.5. TAX IMPLICATIONS
        6. 12.7.6. INFORMATION SOURCES
        7. 12.7.7. SPECIAL FEATURES AND TIPS
      8. 12.8. Key Questions to Ask About Preferred Stock
      9. 12.9. Dividend-Paying Common Stock
        1. 12.9.1. ADVANTAGES
        2. 12.9.2. RISKS
        3. 12.9.3. SPECIAL FEATURES AND TIPS
  10. IV. OPTIONS FOR PURCHASING BONDS
    1. 13. HOW TO BUY INDIVIDUAL BONDS A Tool Kit
      1. 13.1. Buying Online
      2. 13.2. Pricing Information
        1. 13.2.1. REAL-TIME PRICES
      3. 13.3. Key Questions to Ask About Buying Bonds Online
      4. 13.4. Choosing a Broker
        1. 13.4.1. THE RIGHT BROKERAGE FIRM
        2. 13.4.2. CRITERIA TO CONSIDER
        3. 13.4.3. ESTABLISHING A RELATIONSHIP
        4. 13.4.4. USING A STOCKBROKER
        5. 13.4.5. THE MANAGED ACCOUNT
      5. 13.5. Evaluating Bond Prices
        1. 13.5.1. NATURE OF THE MARKETPLACE
        2. 13.5.2. WHOLESALE VERSUS RETAIL
        3. 13.5.3. NEW-ISSUE ORDER AND CONFIRMATION DETAILS
      6. 13.6. Key Information at the Point of Purchase
    2. 14. BOND FUNDS The Good, the Bad, and the Worst
      1. 14.1. Common Ground
        1. 14.1.1. MATURITY
        2. 14.1.2. YIELD
        3. 14.1.3. DURATION
        4. 14.1.4. DERIVATIVES
        5. 14.1.5. ADVANTAGES
        6. 14.1.6. DISADVANTAGES
      2. 14.2. Checking the Costs: Hidden and Unhidden
        1. 14.2.1. LOAD
        2. 14.2.2. OTHER CHARGES
        3. 14.2.3. SEC POINTERS
        4. 14.2.4. MORE ABOUT FEES
      3. 14.3. Buying for Total Return
      4. 14.4. Fund Categories
        1. 14.4.1. UNIT INVESTMENT TRUSTS
        2. 14.4.2. CLOSED-END FUNDS
        3. 14.4.3. EXCHANGE-TRADED BOND FUNDS
        4. 14.4.4. OPEN-END MUTUAL FUNDS
        5. 14.4.5. NOTES TO FIGURE 14.1
    3. 15. BONDS FUNDS A Taxing Matter
      1. 15.1. Tax-Exempt Funds
        1. 15.1.1. MUNICIPAL BOND FUNDS: HIGH YIELD (JUNK BONDS)
        2. 15.1.2. MUNICIPAL BOND FUNDS: MONEY MARKET MUTUAL FUNDS
        3. 15.1.3. MUNICIPAL BOND FUNDS: NATIONAL
        4. 15.1.4. MUNICIPAL BOND FUNDS: STATE SPECIFIC
      2. 15.2. Taxable Funds
        1. 15.2.1. BUY-WRITE FUNDS
        2. 15.2.2. CONVERTIBLE BOND FUNDS
        3. 15.2.3. CORPORATE BOND FUNDS: HIGH YIELD (JUNK)
        4. 15.2.4. CORPORATE BOND FUNDS: INVESTMENT GRADE
        5. 15.2.5. DIVIDEND-PAYING STOCK FUNDS
        6. 15.2.6. FOREIGN BOND FUNDS
        7. 15.2.7. GOVERNMENT BOND FUNDS
        8. 15.2.8. GNMA FUNDS
        9. 15.2.9. INDEX FUNDS
        10. 15.2.10. INFLATION-PROTECTED SECURITIES FUNDS
        11. 15.2.11. LOAN-PARTICIPATION FUNDS
        12. 15.2.12. STABLE-VALUE FUNDS
        13. 15.2.13. STRATEGIC OR MULTISECTOR BOND FUNDS
        14. 15.2.14. TARGET-DATE FUNDS: ZERO COUPON
        15. 15.2.15. TARGET-DATE FUNDS: LIFE CYCLE, OR ASSET-ALLOCATION, FUNDS
        16. 15.2.16. TREASURY BOND FUNDS
        17. 15.2.17. ULTRASHORT BOND FUNDS
    4. 16. CHOOSING A BOND FUND
      1. 16.1. The Search Begins
        1. 16.1.1. MORNINGSTAR
  11. V. BOND INVESTMENT STRATEGIES
    1. 17. INVESTMENT PLANNING WITH BONDS How to Design Your Bond Portfolio
      1. 17.1. Designing a Bond Portfolio
        1. 17.1.1. STEP 1. DETERMINE YOUR LIFE OBJECTIVES AND FINANCIAL NEEDS
        2. 17.1.2. STEP 2. DIVIDE YOUR INVESTMENT PORTFOLIO INTO TWO CATEGORIES
        3. 17.1.3. STEP 3. PLAN FOR TAXES
        4. 17.1.4. STEP 4. SELECT BONDS TO SUPPORT YOUR LIFE OBJECTIVES AND FINANCIAL NEEDS
      2. 17.2. Evaluating Risk
      3. 17.3. Reevaluating Your Portfolio
    2. 18. FINANCIAL PLANNING WITH BONDS Case Studies
      1. 18.1. Critical Choices: Easing Life's Transitions
        1. 18.1.1. CHANGING COURSE
        2. 18.1.2. MEETING A NEED FOR SAFETY
        3. 18.1.3. PLANNING FOR COLLEGE EXPENSES
        4. 18.1.4. AN UNANTICIPATED TRANSITION
        5. 18.1.5. SOCIALLY CONSCIOUS INVESTING
    3. 19. MAXIMIZING PROFITS How to Make the Most Money From Bonds
      1. 19.1. Knowing When to Buy and Sell
        1. 19.1.1. THE YIELD CURVE
      2. 19.2. Strategies for Deciding When to Sell
      3. 19.3. Strategies for Finding Bargain Bonds
      4. 19.4. Strategies for Staying Away From Overvalued Bonds
      5. 19.5. Strategies for When Interest Rates Are High or Rising
        1. 19.5.1. WHEN INTEREST RATES ARE RISING
      6. 19.6. Strategies for When Interest Rates Are Low or Falling
      7. 19.7. Investing for Tax Advantages
        1. 19.7.1. A REMINDER ABOUT TAXES
        2. 19.7.2. STRATEGIES FOR PLACING BONDS IN TAX-EFFECTIVE ACCOUNTS
        3. 19.7.3. STRATEGIES FOR INDIVIDUALS IN HIGH TAX BRACKETS
        4. 19.7.4. STRATEGIES FOR TAX-SHELTERED RETIREMENT ACCOUNTS AND INDIVIDUALS IN LOW TAX BRACKETS
      8. 19.8. Investing and Risk Tolerance
        1. 19.8.1. PRACTICAL CONSIDERATIONS FOR ASSESSING RISK TOLERANCE
        2. 19.8.2. STRATEGIES FOR REDUCING THE RISK OF DEFAULT
      9. 19.9. Strategies for Safe Investing
        1. 19.9.1. STRATEGIES FOR REDUCING MARKET RISK
        2. 19.9.2. STRATEGIES FOR REDUCING LIQUIDITY RISK
        3. 19.9.3. STRATEGIES FOR REDUCING CALL RISK
        4. 19.9.4. Investing for Income Needs and Financial Goals
        5. 19.9.5. STRATEGIES FOR SHORT-TERM GOALS
        6. 19.9.6. STRATEGIES FOR LONG-TERM GOALS
        7. 19.9.7. STRATEGIES FOR INCREASING INCOME
      10. 19.10. If You're Starting Out With Less Than $25,000 to Invest
  12. A. Useful Web Sites
  13. Earn fifteen hours of credit toward your CFP Board CE requirement. See www.bloomberg.com/ce to find out more.
  14. About Bloomberg
  15. About the Authors