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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 11 Investing in Bonds: The Wider Bond Market

Chapter 10 introduced investors to the bond market. However, the examples involved only one type of bond, U.S. Treasuries. The reason why we focus so much attention on Treasuries is that they are the purest type of bond. There is virtually no credit risk to these bonds (despite what Standard & Poor’s might contend). And Treasury bonds have the most active markets so their prices always reflect current conditions. To study the basics of the bond market, there is no better bond to focus on than Treasuries. Yet the U.S. bond market has many other types of bonds including corporate bonds, mortgage-backed bonds, and tax-exempt municipal bonds. In fact, U.S. Treasury bonds constitute only 28.6 percent of all U.S. bonds.

Investors should consider looking beyond Treasuries for three reasons. First, other bonds may offer higher yields than Treasuries. The attractiveness of higher yields is particularly important in 2013 when Treasury yields are at record lows. Second, investing in other bonds helps to diversify the portfolio. Third, municipal bonds, in particular, offer earnings that are exempt from Federal income tax.

To see the range of bonds available in the U.S. market, consider Figure 11.1, which reports the distribution of bonds outstanding as reported by the Securities Industry and Financial Markets Association. At the end of 2012, the total value of the U.S. bond market was $38.1 trillion. Of that total, 28.6 percent was represented ...

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