|
What are Bonds?
A bond is a debt security,
similar to an I.O.U.
When you purchase a bond, you
are lending money to a government, municipality, corporation, federal
agency or other entity known as the issuer. In return for the loan, the
issuer promises to pay you a specified rate of interest during the life of
the bond and to repay the face value of the bond (the principal) when it
“matures,” or comes due.
Among the types of bonds you can
choose from are: U.S. government securities, municipal bonds, corporate
bonds, mortgage and asset—backed securities, federal agency securities
and foreign government bonds.
Some Bond examples include:
- Municipal
Bonds
- Zero
Coupon Municipal Bonds
- AAA
Rated Insured Municipal Bonds
- U.S.
Treasury Securities
- U.S.
Treasury Inflation-Protected Securities (TIPS)
- GSE
Debt Securities
- GSE
Debt Securities - In Depth
- Corporate
Bonds
- High
Yield Bonds
- Fixed-Rate
Capital Securities
- Certificates
of Deposit
- Mortgage
Securities
- ABS
- CMOs
- Fixed-Income
Exchange Traded Funds
- Callable
Securities
- Bonds and Bond Funds
- Credit Derivatives
Bond Variables:
There are a number of key
variables to look at when investing in bonds:
- the
bond’s maturity
- redemption
features
- credit
quality
- interest
rate
- price
- yield
- tax
status.
Bond Interest Rate:
Bonds pay interest that can be
fixed, floating or payable at maturity. Most debt securities carry an
interest rate that stays fixed until maturity and is a percentage of the
face (principal) amount. Typically, investors receive interest payments
semiannually.
Bond Maturity:
A bond’s maturity refers to
the specific future date on which the investor’s principal will be
repaid. Maturity ranges are often categorized as follows:
- Short
term notes: maturities of up to five years
- Intermediate
bonds: maturities of five to 12 years
- Long
term bonds: maturities of 12 or more years
How
to Invest in Bonds?
There are several ways to invest
in bonds. You can buy individual bonds, bond funds or unit investment
trusts.
Investing in Individual
Bonds:
Most individual bonds are bought
and sold in the over-the-counter (OTC) market, although some corporate
bonds are also listed on the New York Stock Exchange.
Bonds sold in the
over-the-counter market are usually sold in $5,000 denominations. In the
secondary market for outstanding bonds, prices are quoted as if the bond
were traded in $100 increments. Thus, a bond quoted at 98 refers to a bond
that is priced at $98 per $100 of face value, or at a 2% discount.
Investing in Bond Funds:
Bond funds offer investors
another way to invest in the bond markets. Bond funds, like stock funds,
offer professional selection and management of a portfolio of securities.
They allow an investor to diversify risks across a broad range of issues
and offer a number of other conveniences, such as the option of having
interest payments either reinvested or distributed periodically.
Money Market Funds:
Money market funds, as the name
implies, refer to pooled investments in short—term, highly liquid
securities. These securities include U.S. Treasuries, municipal bonds,
certificates of deposit issued by major commercial banks, and commercial
paper issued by established corporations. Money market funds also offer
convenient liquidity, since most allow investors to withdraw their money
at any time.
Portfolio Diversification:
No matter what your investment
objective, it makes good sense to diversify your portfolio.
Diversification can provide some protection for your portfolio, so if one
sector or asset class is in the midst of a downturn, the rising value of
another class of assets may help offset the negative impact.
|
