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Month: April 2023

Questions You Were Afraid to Ask #8

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investing-related question that many people have but are afraid to ask. Last time, we answered the question, “What’s the difference between the various types of bonds?” Now, we’d like to continue in that vein by answering:

Questions You Were Afraid to Ask #8:
What on earth do all these bond terms mean?

One common frustration investors have is dealing with all the terms and jargon used in the financial industry. Ever hear two Wall Street types talking? It can be like listening to a bad episode of Star Trek!

Bonds come with a lot of lingos which can be very intimidating for investors. So, in this message, let’s break down a few common terms you’re likely to hear in the media or when thinking about investing in bonds.

As we covered in our last message, when you buy a bond, you are lending money to an issuer. In return, the issuer promises to pay you a specified rate of interest on a regular basis, and then return the principal when the bond matures. In this paragraph alone, we can find four common terms: issuer, par value, coupon rate, and maturity.

Issuer: This is the entity that “issued” the bond to borrow money. Generally, issuers include local and state governments, the U.S. Treasury, and corporations. Whoever it is, it’s their responsibility to make interest payments and repay the amount you initially loaned. This brings us to:

Par Value: This is the amount that must be returned to the investor when the bond matures – essentially, the investor’s principal. (Many bonds are issued at a par value of $1,000.) Note that it doesn’t matter whether the bond matures in 10, 20, or 30 years. Whenever that time is up, the issuer would still pay back the initial par value. You may also occasionally see the term “face value” instead of par.

Coupon Rate: This is the bond’s interest rate, paid by the issuer at specific intervals. For instance, let’s say you owned a $1,000 bond with a 5% coupon rate. The issuer would then pay you $50 in interest each year until maturity. (Note that some bonds pay interest semiannually. In such cases, you would be paid $25 every six months, which of course equals the same $50 in interest per year.)

You may be wondering how coupon rates are determined. There are two main factors: the amount of time to maturity, and the credit rating of the issuer. Typically, bonds that take longer to mature come with higher rates. After all, investors want compensation for not getting their principal back until later. Conversely, bonds with shorter maturities usually pay lower interest rates. Furthermore, if the issuer has a low credit rating – meaning there is some risk that they may not be able to repay their creditors – they will usually pay higher interest rates to compensate for the additional risk.

So, why is it called a “coupon” rate? Once upon a time, investors were given actual, physical coupons to redeem to collect their interest payments.

Maturity: This term is simple.  You’ve probably figured it out already. This is the amount of time until the bond is due to be repaid. A 10-year Treasury bond, for instance, matures 10 years from the date it was issued.

Rating: As mentioned, some issuers have higher or lower credit ratings. An issuer rating signifies the bond’s credit quality. Here in the United States, there are three main rating services: Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings Inc. Each agency rates bonds based on the issuer’s potential ability to pay both interest and principal in a timely fashion.

Price: Hopefully, all these terms have been easy to understand, because here is where things get a little tricky. As you know, bonds can be traded on the open market. For example, let’s say Fred buys a bond, but before it matures, decides to sell it to Fran. The “price” is the amount for which the bond is traded. Sometimes, bonds trade at their par value, but they don’t have to be. For instance, imagine Fred bought his bond for $1000, but trades it to Fran for only $950. The bond’s price, then, is $950, and is said to be traded at a discount. On the other hand, if Fred trades it for $1,050, then Fran would be buying it at a premium.

Why would a bond’s price differ from its par value? Sometimes, due to rising or falling interest rates. For example, if interest rates around the country rise above what they were when the bond was issued, that bond would no longer be as valuable. That’s because the old bond’s coupon rate would be lower than what an investor could get if they bought a new bond. Hence, if Fred wanted to sell his bond before maturity, he would have to do so at a discount.

There is one final bond-related term you should know – yield. In fact, this is probably the one you’re most likely to hear about in the media. Unfortunately, it’s also a little too complex to define in a paragraph or two, so it’ll be the sole subject of next month’s letter.

In the meantime, we hope this message helped demystify some of the lingo around bonds. As you can see, most of these terms aren’t really that complex once you translate them into plain English. Have a great day!

Q1 Market Recap

Have you ever heard the stock market be compared to a roller coaster?  There’s a good reason for this.  While sometimes the markets will go through long, relatively flat periods, there are also times when they will rise and fall, climb and dip with astonishing speed. 

The first quarter of 2023 was the perfect example of this.

As you know, last year was a turbulent one for investors.  Inflation worries, rising interest rates, oil prices, and the war in Ukraine all combined to drag the S&P 500 down 19.4% for the year.1  In fact, it was the worst 12-month span since the financial crisis of 2008. 

The good news is that stocks bounced back somewhat in Q1.  But this is where the roller coaster analogy really kicks in. 

For example, in January, the S&P 500 rose just over 6.5%.2  But in February, the markets dropped 2.6%.2  Things got bumpy in early March, as the S&P rattled up and down like one of those old, wooden roller coasters from the early 20th century.  But the markets hit a hot streak toward the end of the month, and as a result, the S&P finished up 7% for the quarter. 3

Some sectors did even better than this.  For example, tech stocks – which got hammered in 2022 – have enjoyed a much more positive start to the year.  In fact, the Nasdaq, an index made up largely of tech stocks, shot up nearly 17%!3 

A roller coaster, indeed.

So, what was behind the market’s latest thrill ride?  There are a few factors, but chief among them is the Federal Reserve’s war on inflation.  After some data suggested that inflation began cooling off in late 2022, the Federal Reserve started cooling off the rate at which it’s been raising interest rates.  In both February and March, the Fed hiked rates by only 0.25%.4  That’s far less than the 0.75% hikes we were seeing previously.  This has led many investors to hope the Fed won’t raise rates as high as economists expected. 

There are two reasons this matters.  First, the higher interest rates go, the greater the chances of our economy entering a recession.  Second, higher rates tend to eat into corporate earnings.    

Put these two together, and it’s clear why the expectation of lower interest rates – or at least, slower rate hikes – would boost investor confidence. 

So, what does all this mean moving forward?  Is the roller coaster coming to an end?  Is the car pulling into the station? 

This is an important time to remember that current market conditions don’t reflect the present – they reflect expectation of the future.  Investors expect the Fed to stop hiking rates, so investor confidence goes up.  But there are many factors that could cause those same expectations to change in a heartbeat.  For example, inflation is still an issue, and there’s no guarantee the Fed won’t keep hiking rates if prices remain high.  (Indeed, oil prices are on the rise again, which means other prices could rise as a result.) 

Here’s something else to keep in mind.  While the S&P 500 rose 7% for the quarter, raw numbers like that don’t always tell the full story.  Much of that rally was driven by a small group of stocks overperforming – mainly the aforementioned tech companies.  But, as its name suggests, the S&P 500 contains five hundred companies…and most of them barely moved at all.  The rally, in other words, was not broad, but narrow. 

While it has certainly been nice to see the markets trending up again after such a rough 2022, it’s important that we do not get carried away by a few months of growth driven by relatively few companies.  In other words, it’s important we don’t try to get off the ride before the roller coaster has come to a complete stop.    

You see, the roller coaster metaphor isn’t important because it’s cute.  It’s because it contains good advice.  When you board a real roller coaster, you always know generally what to expect.  You know it’s going to be bumpy, jerky, fast.  You know there are going to be sharp turns that whip your head around and sudden drops that make the pit fall out of your stomach.  So, what do you do?  You secure your valuables.  You buckle your seat belt.  You brace yourself.  As investors, it’s important that we keep doing that moving forward – so that, ultimately, we end up at the destination we want, having enjoyed the ride. 

We’ll continue to be cautious, especially in the short term, keeping our hands and legs inside the vehicle until we get a clearer view of what’s in front of us.  And our team will keep watching our clients’ portfolios, doing our best to make the ride as smooth and straight as possible. 

As always, if you have any questions or concerns about the markets, please let us know.  In the meantime, have a great week, a great quarter, and a great Spring!     

1 “Stocks fall to end Wall Street’s worst year since 2008,” CNBC,

2 “S&P 500 Index Historical Prices,” The Wall Street Journal,

3 “Stocks Close Higher in Last Session of Turbulent Quarter,” The Wall Street Journal,

4 “The Fed announces ninth-straight interest rate hike of 25 basis points,” CNBC,

Questions You Were Afraid to Ask #7

Some time ago, we wrote a series of posts called “Questions You Were Afraid to Ask.”  Each one answered a common question many investors have but feel uncomfortable asking. 

When we were young, we were taught that “The only bad question is the one left unasked.”  As financial advisors, we’ve found that statement to be true!  Every day, our clients ask us questions about the markets, taxes, their personal finances, you name it.  Over the course of our careers, we have never thought, “That’s a stupid question.”  Not once. That’s because stupid questions simply don’t exist! 

Lately, several friends and acquaintances who were also receiving our articles asked us to start the series up again.  Since we love helping people in our communities learn more about how finance works, we’re happy to do it.  So, without further ado, let’s answer:

Questions You Were Afraid to Ask #7:
What’s the difference between all these types of bonds?

When you buy a bond, you are lending money to the issuer – generally a company or government.  In return, the issuer promises to pay you a specified rate of interest on a regular basis, and then repay the principal when the bond matures after a set period of time. 

As you know, the markets had a very up-and-down year in 2022.  Whenever that happens, many investors start showing renewed interest in bonds, because they tend to be less volatile than stocks.  This interest may continue in 2023. But there are several types of bonds to choose from, each with different characteristics.  All those options can be confusing, so we figured now would be a good time to give people a brief overview of the main types that investors have to choose from.  Let’s start with:

Corporate Bonds

Corporate bonds are issued by both public and private corporations. Companies use the proceeds of these bonds to buy new equipment, invest in new research, and expand into new markets, among other reasons. These bonds are usually evaluated by credit rating agencies based on the risk of the company defaulting on its debt. 

Corporate bonds can be broken down into two sub-categories: Investment-grade and High-Yield.  Investment-grade bonds come with a higher credit rating, implying less risk for the lender.  They’re also considered more likely to make interest payments on time than non-investment grade bonds. 

High-yield bonds have a lower credit rating, implying higher risk for the investor.  These are typically issued by companies that already have more debt to repay than the average business or are contending with financial issues.  Newer companies may also issue high-yield bonds, because they simply don’t have the track record yet to garner a high credit rating. 

In return for this added risk, high-yield bonds typically pay higher interest rates than investment-grade bonds.  In short, investment-grade implies lower risk for a lower return; high-yield implies higher risk for a higher return. 


Municipal bonds, or “munis”, are issued by states, cities, counties, and other government entities so that entity can raise funds.  Sometimes these funds are to pay for daily operations like maintaining roads, sewers, and other public services.  Sometimes the funds are to finance a new project, like the building of a new school or highway. 

Muni-bonds can also be broken down into two sub-categories: Revenue bonds and general-obligation bonds.  The former are backed by the revenues from a specific project, such as highway tolls.  The latter are not secured by any asset but are instead backed by the “full faith and credit” of the issuer, which has the power to tax residents in order to pay bondholders, should that ever be necessary. 

In other respects, muni-bonds work similarly to corporate bonds in that the holder receives regular interest payments and the return of their original investment.  But they do come with one additional advantage, in that the interest on muni-bonds is exempt from federal income tax.  (It may also be exempt from state and/or local taxes if the holder resides in the community where the bond is issued.)  However, muni-bonds often pay lower interest rates than corporate bonds do. 

U.S. Treasuries

Treasury bonds are the type of bonds you usually hear about in the news.  As the name suggests, these are issued by the U.S. Department of Treasury on behalf of the federal government.  They carry the full faith and credit of the government, which has historically made them a very stable and popular investment.  In fact, U.S. treasuries tend to be so stable that economists often use them as a bellwether for the overall health of the entire economy. 

There are several types of U.S. Treasury bonds.  Treasury Bills are short-term bonds that mature in a few days to 52 weeks.  Treasury Notes are longer-term securities that mature in terms of 2, 3, 5, 7, or 10 years.  Finally, actual U.S. Treasury Bonds typically mature every 20 or 30 years.  Both Notes and Bonds pay interest every six months. 

Finally, we have Treasury-Inflation-Protected Securities, or TIPS.  These are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index, which tracks inflation. Interest payments are made every six months and are calculated based on the inflation-adjusted principal. That means if inflation goes up, so too does the principal in the bond…thereby increasing the amount of interest that is paid. However, if inflation goes down, the principal does too, thereby decreasing the interest rate.

Bonds are an important subject that all investors should know about, so we hope this overview was helpful!  In our next post, we’ll break down some of the terms you will often see associated with bonds that many investors find confusing.  In the meantime, happy spring!