Value of bonds

Here we see how bond yields (interest paid) trend in cycles of about 20+ years. We also see how interest rates could stay low even as the U.S. borrows ever more prodigious sums: China and other nations have, via their central banks, bought astounding quantities of U.S. bonds. The high demand (deficit spending) has been met with equally high supply (of buyers willing to snap up U.S. bonds for a pathetically low rate of interest/yield).

The value of bonds also will vary due to changes in the default risk, or credit rating, of bond issuers. If the issuer of the bond is unable to make timely principal and interest payments, the issuer is said to be in default.

Bonds issued by the U.S. government and by most federally related institutions are considered free of default risk. For other issuers, the risk of default is gauged by credit ratings assigned by four nationally recognized rating companies:

Moody's Investor's Service, Standard and Poor's Corporation, Duff & Phelps Credit Rating Company, and Fitch Investors Service.

Bonds that these rating companies place in the highest categories are known as investment-grade bonds.

Bonds that are not assigned an investment grade rating are called junk bonds. These bonds have a higher degree of credit risk but also offer a higher potential yield.