Three Levels of Research to Measure the Desirability of a Bond
Determining the true value of a bond investment, and how much you’re really going to get out of it in the end, requires three levels of research. You could compare it to buying a home. Shopping for a home, here are the three levels of research you conduct:
Level one: You notice the curb appeal. You take note of the size of the home and whether or not you find it attractive. You also, of course, note the offering price.
Level two: You look at the property taxes, the age of the plumbing, the cost of utilities, and the condition of the roof.
Level three: You expand your view to look critically at the surroundings. How are the schools? Are area homes appreciating? Do the neighbors park their pick-up trucks on the front lawn?
With a bond, you need to go through similar levels of research:
Level one: You notice the curb appeal of the bond: What is the face value, coupon rate, and sales price?
Level two: You dig deeper into the qualities of the bond: What are its ratings and maturity, and is it callable?
Level three: You look at broader economic factors (the bond’s neighborhood), which can greatly influence the value of your bond investment: the prevailing interest rates, inflation rate, state of the economy, and forces of supply and demand in the fixed-income market.
You may not be familiar with all the terms here, such as ratings and callable. You soon will be! They should be part of your research.