There are more methods for analyzing bonds than there are bonds, or so it seems. Even so, some are clearly essential to evaluating risk and potential returns. We’ll look at a few here.

Part I - EVALUATING RISKS

Bond investment risk comes in a variety of forms, including credit risk, interest rate risk, inflation (one form of asset erosion), liquidity and maturity risks.

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Part II — EVALUATING BENEFITS

In Part I, we examined some of the risks associated with bond investing. Here we’ll look more quantitatively at evaluating the potential rewards.

One of the most common and obviously useful quantitative techniques is yield calculations.

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Have you ever found yourself short of cash and wanted to buy something today? You tell yourself, if you just had a faster computer you could learn more and get things done much quicker, leaving more time for other productive activities. Ever borrowed the needed money then paid it back with interest, say by using a credit card?

So do most commercial enterprises. Like you, businesses have only so much cash - working capital - to buy equipment, pay for research and a thousand other items that could be used to improve productivity. Raising productivity lowers costs and increases their income (revenue).

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Bonds aren’t the easiest instrument to understand or trade.

They have more predictable characteristics — owing to their fixed maturity (principal repayment date) and coupon (interest rate). But those predictions are fairly technical and sometimes even difficult to follow for the beginner.

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Unlike the stock market, there’s no central exchange for trading bonds. Nevertheless, the process is almost as easy as trading equities (stocks).

Acquire, if you haven’t already, a brokerage account - such as the ones from a full-service broker or one of the many on-line only trading accounts. In some cases, it’ll be necessary to phone rather than place an order over the Internet.

Ok, that’s the easy part. Now, for the slightly more difficult aspects.

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Research on bonds fills volumes. Or these days, the hard drives of web servers.

Nowhere else in the investing world can the interested investor get more helpful information than that available from the various bond rating agencies.

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Ah, if only the world would stand still - just for a little while. But, in the world of investing (as elsewhere) it’s never so.

Forecasts made on purchasing day have to be adjusted tomorrow in light of changing circumstances and new discoveries. Keeping up with those changes - or, better still, anticipating them, is what bond trading strategy is all about.

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There’s no question stocks get a lot more press. The average investor may never have bought a bond, even after dabbling in Exchange Traded Funds, Futures or even more esoteric investments. Nevertheless bond prices are easier to predict, risk is often low yet with returns that are healthy.

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Investors have too much to think about. Where are interest rates headed? Will the stock market rise or fall? Can investing in mutual funds save money and free up time? And, that eternal nagging question: Where to invest?

That last question is stated just as it should be. Not ‘what to buy (or sell)?’. Investing, true enough, is buying with the intention of selling for capital gains or reaping dividends in some form. But ‘buying’ is an activity carried out for consumption. Investment is undertaken to make a profit.

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Few investors trade in order to lose money. For those seeking to make a profit, comparing the potential returns over different time spans of different instruments is essential. In that effort, calculating yield is central.

The most general meaning of yield is the amount of money returned (usually annually), expressed as a percentage of the initial investment.

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