Money Rehab with Nicole Lapin - Gentlemen Prefer Bonds. Here’s Why

Episode Date: January 24, 2022

Today, Nicole is bringing sexy back to financial bonds. Because, seriously, someone needs to stick up for poor bonds! They’ve gotten such a bad rap. We know that everyone thinks bonds are boring when compared to other investments…but the truth is that bonds are just less risky compared to other investments. And what’s more exciting than knowing exactly how your money is going to grow? Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. When someone says my word is my bond, they mean that you have their promise.

It's the idea that someone's spoken vow becomes their sacred commitment. In the 1500s, this concept allowed merchant traders to make contracts legally binding before the advent of written agreements. In the 1800s, the London Stock Exchange made it its motto, my word is my bond, but in Latin because of course they did. And it was famously used by Queen Michelle Obama herself during the 2008 Democratic National Convention. Well, today we're talking about bonds, financial bonds. You've likely heard that healthy financial diets include bonds. That's because they're more reliable than some other types of investments, like stocks and crypto. In today and tomorrow's episode, I'm going to show you why bonds are not

the ho-hum investments they've been made out to be. Yes, I am bringing sexy back to bonds. Because seriously, someone needs to stick up for those bonds. They've gotten such a bad rap. I know that everyone thinks bonds are boring when compared to other snazzy investments, but the truth is that bonds are just less risky compared to other investments. And what's more exciting than knowing exactly how your money is going to grow? So let's double click on bonds. A bond is essentially a glorified IOU. Let's say you buy a bond from me.

a glorified IOU. Let's say you buy a bond from me. I'm giving you my word that I'll give you your money back with a certain interest rate after a certain period for certain. In general, there are three types of bonds. First, federal government bonds, typically called U.S. treasuries. Second, municipal bonds for cities and towns, otherwise known as munis, and third, corporate bonds for businesses. The history of bonds in America goes back to day one, literally. Treasury bonds and the Department of Treasury at large was founded during the American Revolution. During the revolution, millions of dollars were raised through government bonds for the war effort. As you can probably imagine, war is very expensive, and there is a long history of nations all over the globe using bonds to finance war. Of course, bonds are not exclusively used to

fund war. Tons of important national projects were made possible through bonds. The Golden Gate Bridge, the Louisiana Purchase, the Transcontinental Railroad, Route 66, JFK Airport, the Panama Canal, and the Purchase of Alaska were all made possible with some fundraising through bonds. Yes, bonds have been an important way for the American government to finance infrastructure development, but bonds have also provided for development of some intangible infrastructure as well. Funding projects through government bonds means that the government does not need to rely solely on funding from banks or other private institutions. The government has a responsibility to the public first and

foremost. But when the government gets too snuggly with the big banks, the public, whether or not it's justified, worries that the government will start having to answer to big banks instead of us, the lovely constituents. Receiving funding from the public, however, is an excellent system to keep the needs of the public aligned with government spending. Plus, owning bonds makes Americans financially and spiritually, I would say, invested in America. Not to get all in your feels, but there is a special element of pride involved when you're driving over the Golden Gate Bridge, and you can say that you were part of making it possible. So now you're in on bonds. Cool. You may be asking yourself, what happens next? Which bond

should I choose, Lapin? Before we go any further, let's make sure we have some of the most important bond jargon down. Fixed income. Bonds are also known as fixed income investments because you get a fixed rate of return, that is, interest after a certain period. Paper. Bonds are essentially sold as debt. That's so national and local governments can pay for those big projects I mentioned before, like roads and bridges. On Wall Street, I'm not sure if that was financed by debt, but that could very well be. Debt is known as paper. So all those rap songs with lyrics about getting paper to a Wall Street bro, that means getting into debt. Yikes! That's a miscommunication waiting to happen. Yield.

This is a fancy term for the profit you get back for lending your money. Price. This is how much the bond costs. Now, the value and the yield move in opposite directions. Think of this as a seesaw. When the yield goes up, the price goes down to adjust and vice versa. The easiest way to explain why is that bonds are constantly adjusting rates on the open market. So if a $100 bond is at 10% and the next day the rate goes up to 20%, then the price of that bond

needs to go down so that it's fair to the folks who just bought in that next day at a higher rate. Otherwise, no one is incentivized to choose the bond with the lower rate when there's a shiny new one available at a higher rate. Let's all take a second to absorb that. Okay, next. Coupon payments. This is the profit you're making on the bond on a regular basis as it matures. Maturity date. Of course, in addition to your profit in coupon payments, you also get your initial investment back when the bond reaches the end of its term

or its maturity date. The duration for a bond generally is three months to 30 years. Got it? Yes? Yay! I know that's a few more definitions added to your dictionary. Don't worry if these aren't clicking just yet. I want to introduce them and socialize them with you because in tomorrow's episode, we'll be putting these definitions into lovely context, which will really help hammer the point home. But for now, let me give you a tool for evaluating bonds. Like other investments, the riskier bonds offer more potential payout in order to incentivize investors to choose the riskier option, of course.

In contrast, the less risky a bond is, the less you'll get back. The best way to assess the risk level of the issuers of the bond is by looking at their credit rating. There are a few internationally recognized rating agencies, including Standard & Poor's and Moody's, that rate the creditworthiness of the bond. It's like the credit check you get when you apply for a credit card or mortgage, but take that for the government and using a different scale. For us consumers, credit scores range from 300 at the lowest, so poor credit,

to 850 at the highest, so great credit. For bonds, credit ratings range from D, at the lowest, meaning the government or company is basically in default, to 007. Just kidding. Triple A is actually the highest rating, meaning the country or company is economically rock solid. The lower the rating, the more interest you'll be promised in exchange for your investment. Anything lower than triple B is considered sub-investment grade or junk bonds. Sometimes these bonds are referred to as high

yield bonds, which sounds awesome, like a high-yield savings account. But remember the yield, or interest, is high because the quality is crap. Fun fact, the bond market in general is considered a leading indicator for the economy, meaning that it's a good predictor of what's going to happen in the future. In contrast, lagging indicators point to a trend that's already been happening, like unemployment rates, which typically reflect pains in the economy in the preceding months. So understanding how bonds work will really help you understand and even predict major moves in the economy. For today's tip, you can take straight to the bank. We are halfway there. Stay tuned for tomorrow's episode, where I cover which bonds offer you the most bang for your buck and where to buy them.

See you then. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic,

and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.