Bonds Explained



Eddie the investment broker prepared for the seminar by laying all the printed material out on the table. As investors came in, they picked up the literature, and he realized it would not be difficult for him to explain bonds to them. It was almost time to begin, and he started going over his notes on corporate and municipal bonds. The rest of his team, including the team's tax analyst, would be there to back him up with charts, quotes, and explanations about inverted interest rates, and to explain the tax benefits to the potential clients. Everything seemed to be going smoothly. But then people began asking questions while he was trying to explain bonds to the financially illiterate crowd.



At first, the questions were easy. Then they got tougher. People started asking questions about par values, coupon rates, and return on investment (ROI). Eddie had been answering their questions pretty well up, to this point. But par value was something that he knew little about. He realized that the way he'd explained it was not so good, and that his team members explained it no better. Then someone stood up in the back of the room. Eddied looked and recognized the woman as a talk show investment guru, the kind that runs a mutual fund in the day, and a family at night. She fielded the question, explaining that par value of bonds was simply the face value of the bond that would be received at maturity; essentially the principal. Suddenly, the seminar was looking brighter.

Then someone asked about municipal bond safety, and she said they were usually rated safer than corporate bonds, but that all bonds were giving a rating by a ratings agency, usually either Fitch, Moody's, or Standards and Poors. No one asked about the reliability of these ratings companies, or how they had all failed miserably to rate bonds and their accompanying credit default swaps (CDSs) in the years preceding 2009. But she intended to do a better job than any securities exchange commission official would ever do, and she explained their failures, as well as the relationships of banks and CDSs. Eddie knew that she was right about safety. He had bonds of his own, and since they were rated AAA instead of junk, he didn't worry about default and losing all of his money on the investment.