ibkr bond Investing 101: Types of Bonds and More

Investing in bonds can seem intimidating, but it doesn't have to be. By understanding the basics, you can make informed decisions about your investments.

Bonds are a type of investment where you lend money to an entity, typically a corporation or government, in exchange for regular interest payments and the return of your principal.

There are several types of bonds, including government bonds, corporate bonds, and municipal bonds. Government bonds are issued by governments to finance public projects, while corporate bonds are issued by companies to raise capital.

Understanding the different types of bonds is crucial to making smart investment decisions.

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There are several types of bonds that investors can consider. Corporate bonds are debt securities issued by companies to raise capital.

Government bonds, on the other hand, are debt securities issued by governments to finance their activities. They are often considered to be a low-risk investment option.

Municipal bonds are issued by local governments or other public entities to finance specific projects or activities.

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Government bonds are a type of investment that's often overlooked, but they can be a great way to earn a steady return on your money. One of the key benefits of government bonds is their low risk, as they're backed by the full faith and credit of the government.

The initial margin requirements for US Treasury securities vary depending on the maturity date of the bond. For example, if you're buying a bond with less than six months to maturity, you'll need to put up 1% of the market value as margin.

Government bonds can be a great way to diversify your investment portfolio, as they tend to perform differently than stocks and other types of investments. This can help reduce your overall risk and increase your potential returns.

Here's a breakdown of the initial and maintenance margin requirements for US Treasury securities, based on their maturity dates:

Keep in mind that these margin requirements are subject to change, so it's always a good idea to check with your broker or financial advisor for the most up-to-date information.

Corporate bonds are a type of investment that can be a bit tricky to understand, but don't worry, I'm here to break it down for you.

The margin for corporate bonds is determined using a proprietary Value At Risk (VAR) methodology, which calculates the worst-case loss in the bond price over a specified range of interest rate changes. This is done to ensure that investors are protected from potential losses.

The VAR calculation takes into account the bond's type, with different scanning ranges for investment grade, NYSE-listed speculative grade, and NYSE-listed junk grade bonds.

Here's a breakdown of the scanning ranges for each bond type:

Bonds that contain embedded options, such as calls or puts, are subjected to stress tests that increase and decrease the interest rate period volatilities used to calculate the theoretical price of the bond by 15% of their values.

The regulatory minimum margin for corporate bonds varies depending on the bond type, with investment grade bonds requiring a 10% margin of market value, and non-investment grade bonds requiring the larger of 20% of market value or 7% of face value.

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Trading with the IBKR Bond Scanner is a powerful tool for investors to locate and trade corporate bonds in the secondary market. You can launch the Scanner from the New Window menu at the top left of the screen.

In the Bond Scanner, you can select Corporate Bonds and apply filters to narrow your search, including by maturity, credit rating, coupon rate, and industry. The filters also allow you to exclude bonds with specific characteristics, such as those that have previously defaulted or are trading flat.

To make the data easier to read, you can sort any of the fields by double-clicking on a header. For example, you can sort by company name, which can help you quickly identify the bonds you're interested in.

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You can launch the Scanner from the New Window menu at the top left of the IBKR Trader Workstation (TWS) screen, then select 'Scanners' and 'Bond Scanner' from the submenus.

In the Bond Scanner, you can select Corporate Bonds from the Instrument dropdown menu, and then apply various filters to narrow your search. These filters include maturity, credit rating, coupon rate, and industry.

To refine your search, you can select a specific credit rating, such as an investment-grade 'A3' credit rating, and then choose a particular industry, such as Consumer, Cyclical.

You can also sort the results by double-clicking on a header, making it easier to read and compare the data. For example, you can sort by company name to see the list of bonds in alphabetical order.

In the results, you can see the selection has been narrowed to show only those corporate securities in the desired sector with a credit rating of 'A3' or better as assigned by Moody's. You can also view the specific details of each bond, including the coupon rate, CUSIP, and trading information.

By applying filters and sorting the results, you can quickly and easily find the bonds that meet your criteria and make informed investment decisions.

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Limiting your search results can be a game-changer when scanning through a large number of bonds.

You can adjust the Max Results dropdown selector to narrow down the results to a specific few, making it easier to find what you're looking for.

To narrow down your bond search, you can define a credit ratings range using the Edit button. Click on the dropdown menu to select a minimum rating of 'A2' and a maximum rating of 'Aaa' for the highest level.

This will significantly reduce the number of items the scanner has retrieved, making it easier to choose which bonds to examine further. You can also lift the minimum credit rating requirement and continue restricting the universe if you choose.

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The prices and yields of bonds can be a bit complex, but let's break it down. The coupon rate of a bond is typically lower than the market interest rate, so investors can expect to earn a return through capital appreciation.

A bond with a face value of $1,000 and a coupon rate of 5% will pay $50 in interest per year, as mentioned in the article. This is calculated by multiplying the face value by the coupon rate.

The yield to maturity (YTM) of a bond is the total return an investor can expect to earn if they hold the bond until maturity. For example, a bond with a 10-year term and a 4% YTM will return approximately $1,480, or 14.8% of the face value, over that time period.

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To define a maturity range, you can restrict results to a specific period. Enter the Maturity Date input fields with '01/2028' as the minimum and '12/2035' as the maximum.

Using the format MM/YYYY is crucial, as omitting the month will cause some data to be omitted. This is why entering '01/2028' is essential.

To narrow down your search for bonds, define a credit ratings range by clicking the Edit button and selecting a minimum and maximum rating from Moody's or S&P Ratings Agencies.

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For this exercise, let's choose Moody's and select a minimum rating of 'A2' and a maximum rating of triple-A ('Aaa') for the highest level.

Clicking Search will decrease the number of items retrieved, making it easier to decide which bonds to examine further.

You can also lift the minimum credit rating requirement and continue restricting the universe if you choose.

One of the standout features of IBKR Bond is its ability to offer a wide range of bond investments, including high-yield bonds and municipal bonds.

IBKR Bond allows you to invest in bonds from over 50 countries, giving you access to a global market.

With a minimum investment requirement of just $100, IBKR Bond makes it easy to get started with bond investing.

You can also set up a bond ladder with IBKR Bond, allowing you to invest in a series of bonds with staggered maturity dates.

This helps to spread out your investment risk and provides a steady stream of income.

IBKR Bond also offers a tax-advantaged way to invest in municipal bonds, which can be a great option for tax-conscious investors.

By investing in municipal bonds through IBKR Bond, you can potentially reduce your tax liability while earning a steady income.

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