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Subject:  Re: Beginner's Qs on Bonds Date:  7/15/2004  12:22 PM
Author:  jbking Number:  10466 of 36327

Greetings CMW,

Does the level of risk vary according to the term of the bond?

Term and credit quality are usually what determine the risks of a bond as you could imagine quite a difference between loaning money to the government versus loaning it to a company struggling with its finances.

Which term is generally speaking more or less risky and why?

The most risky is high-yield bonds which are risky mostly because of default risk. After that, the next are long-term bonds since you are usually locked into that rate for so long that you want to be properly compensated for things like inflation and possible interest rate risks. The last part is about why if I allow my money to be tied up for 20 years I should get more than if I just did 4 consecutive 5 year bonds.

If you want some historical notes on bond lengths and risks, take a look at and the T-bills compared with 5 and 20 year Treasuries over a fairly long time frame.

Vanguard's long term bond index had the highest returns (and yield). Doesn't that also mean it has the highest risk?

Yes, due to the NAV possibly fluctuating the most would be my guess. In 1999 the long-term bond index went down 7.9% compared to for intermediate that went down 3%, short-term went up 2.1% and total bond market went up .8%. Just something to be aware of is that bond funds can have negative years in some cases.

Are fed govt bonds generally less risky than corporate and municipal bonds?

For those of the same term, yes. If you take a long-term federal govt bond compared to a short-term corporate then the corp may be less risky.

What's IIRC?

IIRC = If I recall correctly.

Is there a special name for an insured bond or would I just have to plow through the prospectus to find out?

I would take the prospectus as you would want to know who is doing the insuring. Is it a company with billions that can handle defaults or could it be wiped out if there are a few defaults? Vanguard Insured Long-Term Tax-exempt(VILPX) is an example of a fund that invests in insured bonds if you want an example.

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