This series discusses the nuances of fixed income investing, including the risks, opportunities, and investment styles. Topics include:

  • Why Bonds Now?
  • Yield to Maturity: The Yield That Matters
  • Active Management of Bond Risks
  • Interest Rate Risk: Understanding Duration and Convexity
  • Cash and Money Market Funds vs. Bonds: Which is Better?
  • Credit Analysis
  • Liquidity
  • Municipal Bonds

Why Bonds Now?

Traditionally, fixed income has played three important roles in an asset allocation: principal preservation, steady income, and risk reduction. However, pandemic-induced monetary and fiscal stimulus decreased the appeal of bonds due to low yields and interest rate risks. Today, these key attributes of bonds have returned, and investors can expect their fixed income allocation to fulfill its traditional role in a portfolio.

Yield to Maturity: The Yield That Matters

In fixed income investing, there are several different ways to measure an individual bond’s ability to produce income. Three of the most often cited measures are a bond’s coupon rate, current yield, and yield to maturity. Each measure has its place, but which matters the most?

Active Management of Bond Risks

Building a bond portfolio is more complex than simply buying bonds and holding them to maturity. Understanding the risks in fixed income can help an investor avoid pitfalls while optimizing opportunities in pursuit of long-term goals. We discuss the most common examples.

Interest Rate Risk: Understanding Duration and Convexity

Most people look at a bond’s maturity to gauge the security’s risk. However, maturity only looks at the time until repayment of principal. To accurately measure a security’s risk, both principal and coupon payments must be considered. The use of two metrics better defines a security’s risk: Duration and Convexity.

Cash and Money Market Funds vs. Bonds: Which is Better?

Cash–including money market funds, high-yield savings accounts, and short CDs–and bonds are all perceived to be relatively “safe” investments but differ in terms of their risk level and return potential. With some cash accounts yielding as much or more than bonds, some investors may be questioning which asset is better.

Credit Analysis

History has taught us that even highly-rated bonds can quickly experience deteriorating credit quality and wreak havoc on a portfolio. Naturally, credit quality becomes a focus in weakening market conditions, but the importance of credit research in all market conditions must be considered.


Imagine a crowded room with just one exit. If everyone suddenly had to leave, those close to the exit would be fine, but it would be chaotic for others. This is similar to bond liquidity, which is like the available exits. When bonds are highly liquid, investors can smoothly come and go without a hitch. But when liquidity is low, it's like many investors trying to exit through one door. This article delves into bond market liquidity and its effects.

Municipal Bonds

Municipal bonds make up nearly 10% of the investment grade bond market. The $4 trillion in municipal debt is issued by government entities to cover expenses and finance projects that significantly benefit the public. This paper provides an overview of Municipal Bonds, highlighting their tax advantages, illustrating with examples, and exploring their intricacies.

Glossary of Terms

Active Bond Management An approach to buying and holding bonds which applies any number of disciplines to attempt to produce returns in excess of passive management in which bonds are simply held to maturity.
Asset-Backed Securities (ABS)
Bonds made up of a collection of consumer debts.
A bond or other debt security issued by a government agency or government-sponsored agency such as Freddie Mac or Fannie Mae, and are the highest quality debt securities after Treasuries.
Barbell Structure
A bond portfolio comprised of short and longer-term bonds, whose average produce a portfolio with an intermediate maturity, which will react to market conditions in a manner that differs from a portfolio of intermediate bonds.
Bullet Structure
A portfolio of bonds whose individual maturities are similar in term.
Callable Bond
A bond that an issuer can retire prior to its maturity date.
Convertible Bond
A bond which contains an option for exchange for a fixed number of shares of the bond issuer’s common stock.
The rate of change in a bond’s duration, a refinement of duration which reflects the change in a bond’s price that is not accounted for or predicted by duration.
Coupon Rate
The annual interest paid on a bond, based on a percentage of its par or face value.
Current Yield
A snapshot measure of yield, measured by coupon divided by current price.
When a bond issuer fails to make required interest or principal repayments.
A measure of interest rate sensitivity. For example, a portfolio with a duration of three years would be expected to rise 3% if interest rates were to fall 1%. It is measured in years because it can also be used to measure the time it takes to recover one’s original investment taking all cash flows into account.
High-Yield Bonds
Also known as junk bonds, high-yield bonds are bonds issued by companies that are considered to be at a greater risk of failing to make interest and principal payments on schedule.
Mortgage-Backed Securities (MBS)
Bonds made up of a collection of residential or commercial mortgages.
The yield difference between a Treasury bond and a bond of the same duration that has additional risks, such as a corporate bond.
Total Return
The actual rate of return realized over some evaluation period. Considers all sources of return: coupon interest, interest on coupon interest, and any capital gain/loss.
Tracking Error
The divergence in performance between a portfolio and the index it was intended to replicate.
The degree of variation of returns for a given security or market index.
Yield Curve
A graph showing the various yields of similar types of securities that vary in their maturity dates. A flat yield curve is one in which short-term bonds have yields similar to longer bonds.
Yield to Maturity
The rate of return on a bond calculated on the basis of purchase price, redemption price, the total interest payments, and the number of months or years until maturity. The yield to maturity is greater than the current yield when the bond is selling at a discount, and less when the bond is at premium.
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

In addition to the ongoing market risk applicable to portfolio securities, bonds are subject to interest rate risk, credit risk and inflation risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Credit risk is the possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. Bonds may also be subject to call risk, which allows the issuer to retain the right to redeem the debt, fully or partially, before the scheduled maturity date. Proceeds from sales prior to maturity may be more or less than originally invested due to changes in market conditions or changes in the credit quality of the issuer.

Diversification does not assure a profit or protect against loss in a declining market.