Three Levels of Research to Measure the Desirability of a Bond - dummies

Three Levels of Research to Measure the Desirability of a Bond

By Russell Wild

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.