Money markets, CD's and bonds are paying reasonable interest for the first time in years. Today, Alex Cabot and Ed Lambert of Birch Run Financial take us on a "crach course" on fixed income and how it works.
Alex starts by explaining bonds - essentially a loan, or contract between a lender and borrower. He also explains the three main bond categories - government, corporate, and agency. Additionally, we talk about maturity lengths and tax-equivalent yields.
Alex runs through an equation that might be easier to read than hear:
For interest rates, to find the taxable equivalent of a tax-free bond: take the yield and divide by (100 - your effective tax rate).
Example: Your tax rate is 37%, so 100-37 = 63. For a 4% yield on a tax free bond, take 4 divided by .63 = 6.35. Your taxable bond would need to be 6.35% to yield the same as a 4% tax free bond.
Like all investments, bonds carry risk - they are just different than the risks associated with the market. Ed explains credit risk, interest rate risk, and reinvestment risk. Remember the tradeoff - the higher the interest, the higher the risk. We also talk about long-term vs short-term bonds, and current rates, as of our recording on June 22, 2023.
All data in today's episode are courtesy of YCharts.At Birch Run Financial, we believe in a time-tested, diversified, long-term approach. Alex, Ed, and their team are always happy to have a conversation about your investment questions, whether you're a client or not.
You can always email Alex and Ed at info@birchrunfinancial.com or give them a call at 484-395-2190.
Or visit them on the web at https://www.birchrunfinancial.com/
Alex and Ed's Book: Mastering The Money Mind: https://www.amazon.com/Mastering-Money-Mind-Thinking-Personal/dp/1544530536