Owning Bonds
Completion requirements
So far, we've discussed stocks and the difference between stocks and bonds. However, we haven't elaborated on what bonds are and where they are traded. This section discusses bonds and the bond market. While you read, pay attention to how zero-coupon bonds, differed-coupon bonds, and split-coupon bonds differ. You will learn about municipal bonds, which are a way for governments, states, and municipalities to borrow money. Where are corporate bonds and government bonds traded?
Bond Strategies
Key Takeaways
- One strategic use of bonds in a portfolio is to increase diversification.
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Diversification can be achieved
- by an active strategy, using individual bond selection; or
- by a passive strategy, using indexing.
- Spreads indicate the "price" or the yield on default risk.
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Matching strategies to minimize interest rate and reinvestment risks can include
- immunization,
- cash flow matching,
- bond laddering.
- Life cycle investing considers the relationship of age and risk tolerance to the strategic use of bonds in a portfolio.