Questions to Ask a Bond Broker about a Bond
As you enter the world of bond investing, you may choose to work with a broker. But use some caution. Ask the questions in the following list — and get acceptable answers — before parting with your cash.
Who is the bond issuer?
Is it the U.S. Treasury? General Electric? Dade County, Florida? The Russian Federation? Moe’s Hardware Store? A bond is an IOU, and an IOU is only as good as the entity that owes U. In addition, different kinds of bonds have different characteristics, such as taxability, callability, and volatility.
How is the bond rated?
Especially among corporate bonds (more likely to default than municipal or agency bonds), you want to know whether the company issuing the bond is financially stable. Ratings are readily available through any brokerage house.
What is the maturity date?
Long-term bonds tend to pay higher rates of interest, but your money is tied for longer and the price of the bond, should you wish to sell it before maturity, tends to be more volatile.
What is the yield-to-maturity?
There are many ways of measuring a bond’s return. Yield-to-maturity is perhaps the most important measure. (Bond funds, which have no maturity, can be more difficult to compare.)
Is the bond callable?
Can the issuer of the bond hand you back your money at any time? All things being equal, a callable bond is not desirable, and you should get more interest in compensation for the call feature.
What’s the worst-case yield?
Suppose the bond does get called. What would be your yield on the bond at that point? When comparing callable bonds, this figure is very important.
May I please have the CUSIP?
The CUSIP (Committee on Uniform Security Identification Procedures) identification allows you to go to www.investinginbonds.com or www.finra.org to see what recent trades have been made on any particular bond. Doing so gives you a very good idea of what a fair price would be for the bond you’re being offered.