BY KRISTIN HOVENCAMP
This is not your grandfather’s bond market. While interest rates remained near zero, finding quality bonds that yielded anything substantial was next to impossible. As the Federal Reserve continues to take aim at inflation, bond yields are feeling the effect, and investors are finding opportunities across the credit and maturity spectrum. Now that bonds appear more attractive, how do you know which ones are right for your portfolio? Prioritizing your reasons for allocation will better determine what characteristics to look for in a bond. Below are initial evaluation questions an investor should be asking.
Funding retirement. If the principal purpose for investing in bonds is to create a cash flow, the coupon rate is one of the most critical features to understand. The coupon tells an investor how much cash flow a bond will distribute. Cash flow is the present value of a bond’s future interest payments. Annual coupon rate x face value = cash flow.
Generating income. Income is the money earned on an investment. A bond yield tells an investor how much money they will make annually if they purchase a bond and hold it until maturity. Investors whose primary goal is generating income will want to choose higher-yielding bonds.
Capital preservation. The credit quality of a bond should be prioritized over its yield if your objective is to preserve the principal amount invested. Credit agencies rate bonds according to an issuer’s ability to repay the bondholder. The higher rated the bond, then the less likely the issuer will default. AAA, AA, A rated bonds are considered safer investments.
Before you evaluate a bond, determine your intentions for investing in fixed income. Whether your primary concern is funding retirement, generating income, or preserving principal, bond portfolios can be customized to meet your goals.
Kristin Hovencamp is an Investment Executive and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, which is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605.
