What is a Bond? How to Buy a Bond (Fidelity Example)

TL;DR

Learn the basics of buying bonds and how to navigate the Fidelity website to find and purchase corporate bonds.

Transcript

hi I'm Jimmy in this video we're going to look at the basics of what a bond is and then how we can actually go about buying a bond we're going to use Fidelity as an example but the same process should be true in most brokerage accounts so we'll go through an example of what to look for what's important and what could make a bond good or bad dependi... Read More

Key Insights

• ❓ Bonds are loans to companies, offering stability and certainty compared to stocks.
• 👨‍🔬 Fidelity provides a platform to filter and search for different types of bonds, including corporate bonds.
• 🎚️ The credit rating of a bond indicates its quality and risk level.
• 🥡 Yield to maturity is a crucial metric to consider, as it takes into account the bond's current price and reflects the investor's total return.

Questions & Answers

Q: What is the difference between buying stocks and buying bonds?

Stocks represent ownership in a company, while bonds are loans to a company. Stocks can pay dividends, but the company has the right to change or pause dividend payments. Bonds pay a fixed interest rate and the principal amount is returned at maturity.

Q: Why would someone choose to buy bonds instead of stocks?

The advantage of owning bonds is the certainty and stability they offer. Bondholders have a contractual agreement with the company, knowing exactly how much interest they will receive and when they will receive their principal back. This stability can be appealing to investors.

Q: How can I use the Fidelity website to search for corporate bonds?

On the Fidelity website, go to the news and research section, then select fixed income bonds and CDs. Scroll down to find the different types of bonds, such as U.S. treasuries, municipal bonds, corporate bonds, etc. You can filter the bond options based on your preferences.

Q: What does the bond's credit rating indicate?

The credit rating reflects the quality and risk associated with a bond. AAA-rated bonds are considered the highest quality and the lowest risk, while lower-rated bonds may have higher risks. Higher-rated bonds generally have lower interest rates.

Q: How do I find specific corporate bonds, like Microsoft bonds, on the Fidelity website?

On the Fidelity website, search for corporate bonds and enter the company's name, such as Microsoft. The search results will show the different bonds tied to Microsoft. Clicking on a specific bond will provide more details about its coupon rate, yield, and maturity date.

Q: What is the significance of yield to maturity?

Yield to maturity takes into account the bond's current price and calculates the investor's total return if the bond is held until maturity. It reflects the interest rate an investor can expect to earn on the bond. If the bond is trading below par value, the yield to maturity will be higher than the coupon rate.

Q: How can I place an order to buy a corporate bond on the Fidelity website?

After selecting the specific bond you want to purchase, click on the buy option. Enter the quantity (number of bonds), choose a limit yield or limit price, select fill or kill or day order, and choose to pay with cash or margin. Submit the order to complete the purchase.

Q: Is it generally recommended to invest in bonds?

Whether bonds are a good investment depends on various factors, including the current economic environment and an individual's investment goals. In the next video, the content creator will explore whether bonds are a good investment compared to stocks in the current economic climate.

Summary & Key Takeaways

• A bond is a loan to a company, unlike stocks which represent ownership in a company.

• Bonds pay interest on a semi-annual basis and return the principal amount at maturity.

• Fidelity allows users to filter and search for different types of bonds, including corporate bonds.