Thau - The Bond book: everything investors need to know about treasuries, municipals, GNMAs, corporates, zeros, bond funds, money market funds, and more

THE BOND BOOK

Everything Investors Need to Know
about Treasuries, Municipals, GNMAs,
Corporates, Zeros, Bond Funds,
Money Market Funds, and More

Third Edition

Annette Thau

Copyright 2011, 2001, 1992 by Annette Thau. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-171309-2

MHID: 0-07-171309-3

The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-166470-7, MHID: 0-07-166470-X.

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TO FRED

This is the third edition of a book that was initially published in December of 1991. After working for a number of years as a credit analyst, I had started personally investing in bonds. At the time, I looked for a book that would explain in clear English some of the basic concepts used by professionals to manage bond portfolios; and that would contain detailed information about the various types of bond investments available to individual investors. None of the books I found fit that description. Most books that dealt seriously with bonds were not comprehensible to anyone who was not a finance professional. Years later, I decided to write the kind of book I would have liked to have read. Evidently, it would fill a need. Little did I imagine when the first edition was published that I would be revising this book again, for the third time, almost 20 years later.

Over the past 20 years, both the bond market and the stock market have had dramatic ups and downs. Investor psychology toward the bond market has also had its ups and downs. For example, the second edition of this book was written around the year 2000. In retrospect, that was almost the last year of the great bull market in stocks that had started in 1982. At that time, pundits were proclaiming that we were in a new era. Experts were recommending that individuals invest 100% of their portfolios in equities (or perhaps keep a small percentage, say 10%, in cash), and nothing at all in bonds. The decade between 2000 and 2010 proved the experts wrong. Between 2000 and 2010, the stock market suffered two devastating bear markets: in 2002 and in 2008. Even though many sectors of the bond market suffered significant declines during the financial panic of 2008, for that decade, investments in many sectors of the bond market had positive returns and enabled investors to ride out a lost decade in the stock market.

Investor psychology seems to have changed once more: for the past year, more money has been flowing into bond funds than into stock funds. But if these flows reflect the search for a safe harbor, then some investors may be in for an unpleasant surprise. Investors need to be aware that all sectors of the bond market are not equally safe and predictable. Many bonds and bond funds are as volatile and unpredictable as stock funds, posting equity like returns one year, and dismal losses the next. Indeed, some steep losses have occurred in bond funds that had been initially marketed as very low risk investments.

This book, like prior editions, is intended to be a complete introduction to the bond market and to the different types of investments in bonds: individual bonds, as well as different types of bond funds.

There is virtually no section of this book that has not been heavily or totally rewritten. My emphasis has been on changes that have occurred since the 2000 edition. One of the more important changes is that investors can now access a great deal of information, such as pricing data, that in the past was available only through brokers. That information is available on the Internet, and it is free. In addition, all chapters on individual securities include new information. The chapters on bond funds have been totally rewritten. They include a detailed analysis of the performance of all types of bond funds, during and since the financial panic of 2008, as well as ten-year returns through December 2009. There is also a new section on bond exchange-traded funds (ETFs) as well as an expanded section on closed-end bond funds.