What Are We Really Looking at on the Runway?

Until tonight, this is Fashion Week in New York. It's that lovely semi-annual extravaganza where big white tents take over Bryant Park and women trip over their heels just to get a glimpse of next season's looks. This was especially meaningful since it was the last time Fashion Week will be based in Bryant Park. The September shows will be held in Lincoln Center, tear, sniff. I was lucky enough to attend 2 shows this weekend. The first was men's designer Simon Spurr on Sunday where with a few friends I watched and picked out what I liked and didn't like and then chatted about the looks over brunch. The second show I went to was Monique Lhuillier (ready to wear, not bridal) where again I could see what I liked didn't like but in addition I went with a friend who is a designer and could verbalize specific trends and styles. Basically after listening to my designer friend discuss the different elegant looks that strutted passed us, I realized that without knowing the specifics of a dress and how it is made, one cannot know whether or not a dress would truly be a good fit for them. This holds true for bonds as well. While you may like the look or yield of a bond, without knowing the specific details, how can you tell if it's a perfect fit or something that will make you look dowdy or default? Below are the details of bonds and what each part means to you, the buyer.

Every bond has a coupon, it may be zero, but either way it is fixed at the time of issuance. The coupon is what you are paid out every year. If the bond has a 0% coupon, you buy it at a discount and the interest compounds on itself as though it were paying a coupon and you get all your interest at maturity. A bond's maturity is it's ending date. That is the date you get your principal (face value of how much you originally bought) back. A bond's call date is when the issuer has the option to call the bond in (usually at 100) to give you back your principal early and stop paying interest. Once a bond hits its call date, the issuer has the option to call the bond anytime after that with 30 days notice to the bond holders. Some bonds are non-callable which is usually advantageous to the buyer. Bonds have 2 forms : Book Entry and Registered. Book Entry just means that your bond is held in electronic form so you don't hold the actual paper and have to worry about losing it. Nearly all bonds are in book entry form now. Bonds that are Registered have the option to be printed on to actual documents you can hold. The powers that be are not a fan of this because it is difficult to track and now charge at least $150 just to have your bond printed. Not worth it in my opinion. Moodys and S&P (Standard and Poor) are the 2 main rating agencies which will tell you what your bond is rated from AAA all the way down to NR. A third rating agency is Fitch which actually keeps ratings up to date a little more than the other two. The last and most important facet of your bond is your yield to worst. This is your true yield on your investment. Whether you paid a premium (above 100) or a discount (below 100) your SEC Yield/Yield to Worst is what you want to know. If the bond is a premium, your yield to worst is the yield to call and if your bond is a discount your yield to worst is the yield to maturity.

Once you take a look at the details of a bond and know what each mean to you, looking over each part is like trying it on. If you like what you see, make the purchase. If you think it's a little too long and would need it hemmed a bit, you might want to wait and see what comes around next time. Moral of the story is, you can't just buy a bond because of it's pretty color (yield).