Some info on bonds – Macro

This comes from a free newsletter I get on the markets– Neil George’s By George! daily email letter.

How about a little primer on bonds for those who still haven’t followed me into one of my favorite parts of the capital markets?

Bond prices move daily by small increments–it’s those small increments on serious money that can make or break your portfolio.

Bond prices are quoted in terms of percentage of par or whole.
A bond priced at 100 is valued at $1,000. Price movements go in decimals, except in a few government markets. So if a bond is priced at 101, it’s worth $1,010. Or if the price is 99, it’s at $990.

At maturity, bonds end up at par (100). The coupon rate is stated as a percentage, but the yield is to the maturity, based on the internal rate of return of interest and principal payments.

If a bond is priced at 100 with a coupon of 5 percent, the yield to maturity is 5 percent. As the bond price increases, the yield of those 5 percent annual interest coupons–plus the amortization of the premium price–would fall below 5 percent.
Likewise, if the price of the bond were less than par, the yield would be higher than the stated coupon percentage.
The longer the maturity, the bigger the price movement for each similar incremental change in yield. For each 1 percent change in yield, a one-year bond would move in price by 1 percent. A five-year would move about 3 percent, a 10 year about 7 percent and a 30 year about 14 percent.

This is the impact of duration. Longer duration means more price movement for market yield or interest rate changes.
Lower duration means less movement (i.e., stability).

The key is to know what to expect from the market, to pick the type of bond and the maturity to cash in on the changes–just like you do for stocks. Right now, focus on the intermediate area for higher-yielding bonds of companies and countries, which will pay us more money now and give us gains in quarters to come.