hi I'm Jimmy in this video we're going
to look at the basics of what a bond is
and then how we can actually go about
buying a bond we're going to use
Fidelity as an example but the same
process should be true in most brokerage
accounts so we'll go through an example
of what to look for what's important and
what could make a bond good or bad
depending on the current situation but
before we jump into that I just want to
tell you about a website that we are
building an investing website that we're
building I will leave timestamps in the
in the description below if you want to
skip past this part but basically we're
building an an investing research
platform we're starting with different
ways to value stocks we've already built
the discounted cash flow calculator
we're fine-tuning that and we're going
to be adding all of the other different
valuation methods out there but the idea
behind the investing research platform
is that we're going to try to simplify
the process so if we were to pick a
stock like a company like Tesla well we
punch in the ticker and the comp the
website will kick back why what
valuation methods are best for that
company and then it will give you what
the fair value should be using that
valuation method it will work for banks
it will work for large cap companies
like apple but then after we do the
valuation size but then from there the
plan is to add balance sheets income
statements company research reports uh
annual reports things along those lines
this is a long-term big picture thing
but if you want to sign up to get access
to this if you sign up now you can sign
up on an annual basis and if you sign up
you you will lock in the price
indefinitely the price will never go up
on you if you sign up now as we're
starting to roll out the different
features for now let's jump into the
basics of what a bond is okay so at its
very core let's imagine that we're an
investor and then we have a company
a bond unlike a stock a bond is simply a
loan to that company so when we buy a
stock we're actually buying a piece of
the company we owe own a piece of the
company if we buy a bond we are
essentially lending to that company they
owe us the money back now the very
basics of how would work is we would
take our initial investment we give it
to the company we lend them the money
they then have to pay us interest back
so most bonds pay on a semi-annual basis
so twice a year so at the start of the
year they would pay us our interest
payment at the end of the year or at the
halfway point of the year they would pay
another interest payment and then
depending on when the bond matures so at
some point that we're going to get our
principal back let's say it's a one-year
Bond we'd get two interest payments and
then we would ultimately get our
principal back to us so the advantage to
owning a bond is that versus the stock
is that a stock you don't really know
what you're going to get a stock might
pay a dividend but you're not sure are
they going to keep that dividend they
the company generally has the right to
change the dividend amount to pause the
dividend increase it whatever they want
with a bond well it's a contractual
agreement that we will pay we will lend
the company let's say a thousand dollars
and in return the company is going to
pay us five percent a year or 50 a year
if it was a semi-annual payment which
most bonds are that would be twenty five
dollars every six months again the
advantage to this is the
the certainty and the stability of it
but for now let's jump over and look at
how we can actually go ahead and buy one
or how we can even look to see which
ones are out there okay so when we jump
over to the Fidelity website well I go
to this page by going to the news and
research section and then down to fixed
income bonds and CDs so when we scroll
down here we can see bonds now within
this Fidelity gives us the option to
filter out different types of bonds and
then we can see at this middle section
here well they have each type of bond
grouped differently so this first page
the tab we started at least in the case
of fidelity is U.S treasuries these are
government bonds these are as close to
we get as close to as any investor can
get as a guaranteed investment they also
pay because they are so guaranteed
they're also they also pay generally a
lower interest rate we can get CDs
uh municipal bonds corporate bonds
agency bonds or you can look at all
you can see all of them they have 124
000 in some odd other bonds the bond
market is enormous it is bigger than the
stock market there's more money in bonds
than there are in stocks and that says a
lot but in this example let's jump over
to corporate bonds so once we get into
the corporate bonds section well now we
can let's say we wanted to filter this
according to their credit rating so in
Moody's AAA very best credit rating a
company could have we could say okay
only show me the AAA corporate bonds you
can see that this rating goes all the
way down to baa2 or baa3 these are they
call them investment grade bonds that's
what this section is up here investment
grade bonds high yield are considered
bonds that are have more risk their
credit rating isn't quite as high in
fact when we go into the high yield
section we can see the Moody ratings
should yes the Moody's rating changed
they go from C all the way to ba1 again
the higher the rating the closer you get
the AAA the higher the quality the
company but the higher the quality of
the company the lower the interest rate
you pay now let's imagine we can go
through and filter those out but let's
imagine that we had a specific company
we're interested in perhaps we're
interested in a company like Microsoft
well here we can scroll back up to the
top instead of searching by q-sip qsip
by the way is an identifier for all
Investments all investments will get
it's like a combination of letters and
numbers it's I forget how many digits 10
12 something like that different digits
uh letters and numbers that I that are
specifically for that particular
investment it's a weird way to search uh
but what you can do is you can say I
want to search for corporate bonds and
then we could type in the company name
here so when I search for Microsoft well
we get this result back we can see that
there's 30 different possible
Investments for Microsoft when we click
on it we end up here
okay now here's the specific information
about the different spot about each of
the bonds tied to Microsoft let's break
this down a bit and look at what
information the bond is important okay
so on Microsoft's bond list well the top
one we can see has a coupon rate of 5.2
percent now it's very important the
coupon rate is essentially the interest
rate that they're going to pay us so if
if we were to buy that at a hundred and
this is the important part if we were to
pay a hundred for that Bond right 100 of
the of the par value if we were to pay
par value it would be 5.2 percent per
year
but these are trading afterwards many
times you'll buy bonds from other people
so you won't pay par value and if that's
the case the interest rate that we want
to look at or the coupon rate or the
yield that we want to pay attention to
is the yield to maturity in this case
they have yield to maturity ask and
yield to maturity bid
in our case if we're buying the bond we
want to we're going to pay the ask price
so we want yields to ask now I know that
this is small so to try to make it a bit
bigger I'm going to click inside this
first Bond here we're going to go over
to price and performance where we can
find a lot of the key information
yes we agree to the uh their data
agreement now let's look at some of this
key information I'm going to zoom in a
bit so when we look at the details of
this particular Bond well we can see
that they have yield asked yield to
worst and ask yields to maturity now the
idea behind it last
ask yield to worst is that some bonds
can be called away from us so if we own
the bond the company can buy it back
early and that would be in theory like
the worst case scenario then there's
yield to maturity we can see in this
case the bond yield uh the yield to
maturity and yields to worst is the same
so odds are this bond is not callable
and I double checked it's not callable
uh but we can see that right now the
yield is about 4.6 percent but we saw it
was 5.2 percent and the reason that the
yield has dropped the yield to maturity
is dropped is because of the price if we
look at the ask price it is about 100
seven dollars per Bond 107 percent it's
not a hundred seven dollars it's a
hundred percent of par value we'll come
back to that in a second so because the
price has gone up the yield has gone
down we're paying more for the same 5.2
The 5.2 percent is important to us
because we know that's going to be about
52 dollars per year you most bonds pay
twice a year so twice a year every six
months you get 26 bucks simple enough
and then at the end you will get 100 of
par value back again par value is
probably a thousand dollars but we'll
come to that in a second when we look at
their spread to treasuries well what
that does is it takes a bond of a
similar maturity but it Compares it to a
treasury bond so this Bond when we
scroll up we can see this Bond matures
on 6 1 20 39. so a bond a treasury bond
that matures about the same at the about
the same time about the same distance
from today well that would be this bond
is 75 or 77 basis points higher seven
tenths of
7.77 tenths of one percent so slightly
into one percent that makes sense for a
company like Microsoft a large Blue Chip
company that has tons of cash and tons
of cash flow and nobody's really
questioning whether or not they could
pay off their bonds and we can see the
treasury Benchmark information just
below it here okay now let's pretend we
wanted to jump in and we wanted to buy
this Bond well when we scroll up and we
go to the top right hand corner of this
Bond page we will see the buy option
here's what it looks like when we click
in there okay so over here in
Microsoft's bond order Buy pay or buy
sell order page basically well we can
see our first option is to buy we we're
going to buy now we're going to want to
buy one Bond now this is very important
because as we could see what it says
down here one Bond equals a thousand
dollar par value
so if we say we want to buy one and it
was trading at par value would cost us
one thousand dollars we could see the
price up here it says it's trading at
106.89 well we move the decimal place
one decimal place over that's one
thousand sixty eight dollars and ninety
nine cents so that is what it will cost
us for one Bond so if we want two bonds
it will cost us a bit over two thousand
dollars that's that's how the math of
this works bonds are generally quoted on
a percentage basis so again move the
decimal place from these bonds according
hundreds if this in this case par value
is thousand if par value were ten
thousand one Bond would be worth ten
thousand dollars so one bond is going to
cost us a thousand sixty eight dollars
at this price so we say all right we
want one Bond here
we could do limit price or limit yield I
think limit yield is easier because
usually that you know where you're
trying to go with that so we could see
the ask yield is up here 4.6 percent
well we could enter 4.6 right there
then we have uh fill or kill or day
order day cancels at the end of the day
filler kill says basically give me my
entire order or don't give it to me at
all you know I don't want like partial
delivery or anything like that and then
the final option that I was covering up
there was do you want to do it with cash
or do you want to do it on March again
that depends on every investor what they
want to do but that's the basics of how
we can go about investing in bond and if
you're curious if bonds are actually a
good investment we've got a video coming
out for that next looking at whether or
not Bonds given the current economic
environment are good compared to
something like stocks and if you'd like
to sign up to get access to our website
which we're currently in beta version
we've rolled up the discounted cash flow
calculator and we will gradually roll
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again if you sign up we are locking in
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on you once you sign up thank you so
much for sticking with me all the way to
the end of the video I really do
appreciate it thank you and I'll see in
the next video