Bond Trading For Dummies - Make Better Trades

Unless anybody gets offended by the title of bond trading for dummies, it is only a reference to the popular use of the "for dummies" label on books providing for basic knowledge on specific areas of life such as baseball, stocks and bonds. In this article, the topics discussed are designed for the newbie bond investor who wishes to know more about bond trading without going through a voluminous book.

Bond Trading For Dummies - Bond Selection

The first consideration in bond trading is to choose the bond for investment. If only you can do a minnie-mynnie-moo type of choosing, you probably will do so but at great cost to your investment portfolio. You should learn to perform fundamental analysis that most bond trading for dummies books extensively discuss.

To simplify matters, your first considerations in choosing the bond for investment are price and yield. On one hand, bond price is simply the amount of money paid upon the purchase of the bond, which may or may not be equal to its face value. For example, the bond's face value may be $1,000 but you can purchase it for $950 - a discounted value.

On the other hand, the bond yield refers to the income on the debt security. Its value is based on many factors including but not limited to the bond's interest rate, its current price and its remaining years to maturity date.

For example, if you purchased a $1,000 bond for its face value and it has a 5% annual interest, then its coupon income is $50 per year. This being an article on bond trading for dummies, the example is an oversimplification of the numerous ways that yield can be computed.

Basically, the bond price and yield calculations provide an objective basis by which bond selection can commence. For example, if Bond A provides for a higher rate of return on investment from bond yield calculations, then it is logical to assume that it will be chosen over Bond B.

Bond Trading For Dummies - Bond Swap

Buy and sell is not the only possible transaction with bonds. You also have the option of bond swapping, which is not as difficult as it appears. Basically, bond swapping means selling one bond and then immediately purchasing another bond with the funds generated from the first sale. Your next question will then be: Why bother with bond swap when it is just so much trouble?

This is where we move beyond the bond trading for dummies area albeit just a little bit. Investors form projections that involve estimates of changes in interest rates, personal tax circumstances and credit risks, among other factors affecting bond yield. From these projections, investors will change their minds about waiting out the bond until its maturity date, thus, the popularity of bond swapping.

For example, your initial computations on bond yield resulted in a 10% yield for Bond A. The constantly changing economic environment and the corporate situation made the previous yield rate slide down to just 7% for Bond B but it made Bond A's yield rise to 10%. You will then want to swap Bond A for Bond B for obvious reasons.

There are many more things to discuss in a bond trading for dummies book, of course. This article is just the beginning of your journey in learning more about bonds and how to profit from these debt instruments.