Evaluating Bonds
Before you begin bond investing, evaluate different bonds. When comparing bonds, look at the par value, the coupon rate, the maturity date and whether or not the issuing organization will have the right to call the bond early.
The par value is the amount of money that will be paid to you when the bond matures. The coupon rate is the amount of interest you will be paid periodically throughout the life of the bond. The maturity date is the date that the issuing organization will pay you the par value.
Although the maturity date is a fixed date, a company that retains the right to call a bond may decide to return the par value to you early.
Municipal Bonds
Include municipal bonds in your bond investing strategy to earn interest that is exempt from federal taxes. Municipal bonds are bonds offered by state or local governments to allow them to borrow money and avoid raising taxes. Because a state or local government has a chance of going bankrupt, the interest rates offered by these bonds are higher than with federal bonds. State or local issued bonds are also called Municipal bonds.
Corporate Bonds
Include corporate bonds in your bond investing strategy to get the highest interest rates. Corporate bonds are bonds issued by businesses. These bonds are sold and traded much like stocks. Because there is a chance that the corporation may fold during the term of the bond, interest rates are often higher than for government bonds.
Junk bonds are a type of corporate bond issued by a company with a low credit score. Although interest rates for junk bonds are higher than for their conservative counterparts, the risk of default is also much higher as well. For this reason, it is best for most investors to stick with the traditional corporate bond.
Bond Mutual Funds
Because timing the bond market is so tricky, you¡¯re probably better off doing your bond investing through bond mutual funds. Bond funds are available in a variety of risk levels and with a variety of returns. Funds that specialize in shorter-term funds are safer than those that specialize in longer-term funds. As with other investments, safer bond funds mean less of a return. Ask for a bond fund prospectus and check out the companies represented in the portfolio before making any decisions about bond fund investing.
Church or Synagoge Bonds
Churches and synagogues occasionally offer bonds to members in order to help pay for improvements or management costs. Unless you are wealthy and have a significant amount invested elsewhere, find another way to donate to your religious community. These bonds commonly don¡¯t provide a competitive return and should be avoided as a bond investing strategy.
Bond Ratings
Before you leap into bond investing, look at a bond¡¯s rating to get a good idea of how risky the bond is. Bond ratings are issued by several different ratings institutions. Each institution has a slightly different method for rating, so look into a few different ratings to get a good overall picture of a bond¡¯s safety.
In general, the safest bonds will have a rating that begins with A, such as AAA or Aa1. The more risky a bond becomes, the further down the alphabet its rating is until it reaches D for default.
Bond Investing Basics
Learn the bond investing basics before jumping into the bond market.
When you buy a bond from the government, a company or another organization, you are loaning your money to that organization in return for a fixed interest rate. Unless the organization goes bankrupt, you will be paid that interest rate at predetermined periods during the life of the bond.
Bonds are a good place to invest money that you will need within the next few years. They have a lower yield than stocks, but are also much less risky. If you are saving up for a home or are planning on retiring soon, more of your investments should be in bonds than in stocks.
Federal Government Bonds
Treasuries, or federal government bonds, are a good option for people in high tax brackets who can use a tax break. Any interest earned on a treasury bond is tax-free from both state and local taxes.
Because the federal government is not likely to go bankrupt, treasuries are a very stable type of bond. This means that they also offer low interest rates. Bond investing in treasuries is safe, but not as lucrative as other bond investments.
Trading Bonds
Trading individual bonds is not a beginner bond investing strategy. Still, a fundamental knowledge of bond trading can be useful.
If a bond is bought before long-term interest rates fall, it can be sold for a profit because it is worth more in interest than the bonds being sold at the lower rate. Conversely, if a bond is bought right before long-term interest rates rise dramatically and then sold, it will be sold for a loss. Even though selling a lower-yield bond could lose money in the short term, a seller needs to take into consideration how much interest can be made by channeling the money from the sale into a higher-yield bond. Buying and selling fees must always be included in the cost/benefit analysis.