Why are bonds factored

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Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Other market conditions can also affect pricing. Limited supply of a particular bond will generally create more price volatility versus a bond with plenty of supply.

Click here to enlarge. The credit quality of an issuer affects bond pricing. The more financially questionable an issuer is, the lower the price higher yield of their bond. Ratings are not a recommendation to buy, sell or hold and may be subject to review, revision, suspension or reduction, or may be withdrawn at any time. Some municipal bonds carry insurance in which case, the overall rating may be different than the underlying rating which is a reflection of the creditworthiness of the obligor.

Default risk goes hand-in-hand with credit risk. Bonds with higher default risk will be rated very low in the below investment grade rating categories listed in the box. Investors in risky rated bonds sometimes referred to as junk bonds demand higher potential returns and therefore pricing will usually provide relatively higher yields versus higher rated or investment grade credit quality bonds.

Reinvestment risk is an important consideration for callable bonds. The ETF has an effective duration of 6. One of the fastest-growing areas of the smart beta space is multi-factor funds. A simple explanation of multi-factor ETFs is that these funds employ multiple investment factors, such as low volatility, quality and value, in one fund.

This methodology can be applied with bond funds and to the advantage of investors. Applying quality to bonds can help limit default risk, but that factor on its own can potentially weigh on yield and a bond portfolio's long-term returns.

There are pros and cons to emphasizing value with bonds, too. However, these higher yielding bonds are often the most risky, resulting in a lower risk-adjusted return than the broad market. The value portfolio could generate higher returns and yields but not without the cost of higher risk. This may not be palatable to fixed income investors, especially those who rely on their bond portfolio as a source of relative safety and stability.

Fixed Income Essentials. Portfolio Management. Automated Investing. Actively scan device characteristics for identification. Use precise geolocation data. Personal Finance. Your Practice. Popular Courses. Personal Finance Loan Basics. What Is a Paydown Factor? Key Takeaways A paydown factor is the percent of principal received relative to the original principal amount. This factor enables borrowers to better understand paydown rates. A paydown factor is commonly reported when analyzing structured products and mortgage-backed securities.

The paydown factor provides an indicator for the level of principal being paid down across a structured credit product's portfolio and thus serves as a good measure of the performance of these investments. Ginnie Mae requires all mortgage-backed securities issuers to publish their paydown factors. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. What Is a Bond? A bond is a fixed-income investment that represents a loan made by an investor to a borrower, ususally corporate or governmental.