NEW MORTGAGES ARE often securitized, meaning they’re packaged into bonds and sold to investors. An attractive investment? Mortgage bonds should yield more than comparable government bonds, in part to compensate investors for so-called prepayment risk.
That’s the risk that homeowners will pay off their mortgages early, perhaps because they move or refinance or, alternatively, by making extra principal payments. That early mortgage payoff is more likely to occur if rates fall. Homeowners with older,

MUNICIPAL BONDS CAN pay interest that’s exempt from federal taxes and, if you own bonds from your own state, maybe state and local taxes as well. Sound appealing? Before buying, you should calculate whether munis make sense given your tax bracket. We tackle that topic in the chapter devoted to investment math.
If munis will give you a higher tax-equivalent yield, you might be tempted to purchase a muni fund that focuses on bonds from your state,

SAVINGS BONDS COME in two flavors: EE and I. Series EE bonds pay a fixed interest rate for up to 30 years. That rate is reset every May 1 and Nov. 1, and  is earned by bonds sold over the subsequent six months. You can find the current rate here.
Meanwhile, I bonds increase in value along with inflation, plus holders can sometimes earn a small additional sum, which represents the return over and above inflation.

IN JANUARY 2014, the U.S. Treasury began selling floating rate notes. The notes have a two-year maturity, with interest paid quarterly. Their yield changes based on the interest rate for 13-week Treasury bills. Through TreasuryDirect, the minimum purchase amount is $100. As with other Treasury bonds and many government agency bonds, the interest is taxable at the federal level, but exempt from state and local taxes.
With short-term interest rates currently so low, the yields on floating rate Treasurys are tiny.

INFLATION-INDEXED Treasury bonds, formally known as Treasury Inflation-Protected Securities, or TIPS, were first sold in January 1997, with the 10-year note initially yielding 3.45 percentage points more than inflation. Unfortunately, yields have been trending lower ever since. They did briefly spike above three percentage points in late 2008. But that rich yield didn’t last long. You can find the latest yield on 10-year TIPS here.
While the yield on regular 10-year Treasury notes is often depicted as the risk-free rate,

THE TREASURY MARKET is the largest sector of the U.S. bond market. But it isn’t important simply because of its size. The Treasury market also provides investors with a crucial number: the yield on the 10-year Treasury note. This benchmark rate is used for all kinds of purposes, including figuring out a fair price for corporate bonds, valuing stocks, forecasting inflation and pricing mortgages.
On top of that, many investors view the yield on the 10-year Treasury as the risk-free rate.

THE CASE FOR LOW-COST funds, including index funds, is especially compelling when it comes to bonds. But you might do even better—by buying newly issued Treasury, municipal and corporate bonds, and then holding them to maturity.
That way, there’s typically no commission involved, you pay the same offering price as everybody else, including institutional investors, and you don’t have to worry that the dealer has marked up a bond’s price excessively. In the secondary market,

INVESTORS WILL OFTEN tout the benefits of individual bonds, while disparaging bond funds. Why? Owners of individual bonds not only avoid fund expenses, but also enjoy a comforting degree of certainty. If you buy a seven-year bond, you know how much interest you will receive each year and what sum you’ll get back when the bond matures in seven years. By contrast, if you own a fund that focuses on bonds with an average maturity of seven years,

IN TODAY’S LOW-YIELD world, it’s crucial to hold down investment costs. Suppose a bond fund charges 1% in annual expenses. If the fund owns bonds yielding 10%, the after-cost yield collected by the fund’s investors would be 9%. That means investors are losing a tenth of their investment income to expenses. But if the fund’s bonds are yielding 4% and the fund charges 1%, investors will collect just 3%, as expenses snag a quarter of their potential yield.

BOND INVESTORS FACE a number of risks, such as inflation eroding the spending power of their interest payments and the possibility that the issuer of their bonds might default. But a major concern is rising interest rates. An increase in interest rates drives down the price of existing bonds, which appear less attractive compared to newer bonds with their higher interest payments.
For an individual bond or bond fund, this risk is captured by a measure known as duration.

ON SEPT. 30, 1981, the yield on the benchmark 10-year Treasury note hit a high of 15.84%. Almost four decades later, on Aug. 4, 2020, the yield plunged to 0.52%. And that, in many ways, was the big financial story of the past four decades. As interest rates fell, bond prices rose. That enriched existing bondholders, while also boosting enthusiasm for stocks, which appeared more attractive as bond yields declined. The fall in interest rates made it cheaper for almost everybody to borrow,

INDEX FUNDS HAVE, historically, weighted stocks based on their total stock market value. But critics claim this overweights expensive stocks, because a stock’s importance in an index climbs as its share price climbs. One solution: Change the way we weight stocks.
That’s the idea behind fundamental indexing, which was developed by Research Affiliates, a Newport Beach, Calif., money manager headed by Robert Arnott. In 2005, the firm launched its Research Affiliates Fundamental Index, or RAFI,

WHILE MANY OF THE relatively recent contributions to factor investing haven’t withstood close scrutiny, one has caught on—that from Robert Novy-Marx, a finance professor at the University of Rochester (“The Other Side of Value: The Gross Profitability Premium,” Journal of Financial Economics, 2013, Vol. 108, No. 1). He examined the stock market performance of companies based on their profitability, as measured by the ratio of gross profits to assets. Gross profits are a company’s revenues minus what it cost the company to make the goods that were sold.

WHAT GOES UP KEEPS going up—or so it seems. Numerous academic papers have documented momentum in stock prices, notably the 1993 paper by Narasimham Jegadeesh and Sheridan Titman  (“Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” Journal of Finance, Vol. 48, No. 1). Many quantitatively driven money managers follow a value strategy, but also look for upward price momentum, with a view to buying beaten-down value stocks that are starting to revive.

THE VIRTUES OF VALUE investing have long been recognized, thanks in large part to legendary investor Benjamin Graham, co-author of Security Analysis, the classic investment tome first published in 1934. Still, the value effect received its most famous academic endorsement in a 1992 paper by finance professors Eugene F. Fama and Kenneth R. French, who defined value stocks as those shares that trade at a low price relative to their book value (“The Cross-Section of Expected Stock Returns,”