|
Investing in bonds is very safe, and the returns are
usually very good. There are four basic types of bonds available and they are
sold through the Government, through corporations, state and local governments,
and foreign governments.
The greatest thing about bonds is that you will get
your initial investment back. This makes bonds the perfect investment vehicle
for those who are new to investing, or for those who have a low risk tolerance.
The United States Government sells Treasury Bonds
through the Treasury Department. You can purchase Treasury Bonds with maturity
dates ranging from three months to thirty years.
Treasury bonds include Treasury Notes (T-Notes),
Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by
the United States Government, and tax is only charged on the interest that the
bonds earn.
Corporate bonds are sold through public securities
markets. A corporate bond is essentially a company selling its debt. Corporate
bonds usually have high interest rates, but they are a bit risky. If the
company goes belly-up, the bond is worthless.
State and local Governments also sell bonds. Unlike
bonds issued by the federal government, these bonds usually have higher
interest rates. This is because State and Local Governments can indeed go
bankrupt – unlike the federal government.
State and Local Government bonds are free from income
taxes – even on the interest. State and local taxes may also be waived.
Tax-free Municipal Bonds are common State and Local Government Bonds.
Purchasing foreign bonds is actually very difficult,
and is often done as part of a mutual fund. It is often very risky to invest in
foreign countries. The safest type of bond to buy is one that is issued by the
US Government.
The interest may be a bit lower, but again, there is
little or no risk involved. For best results, when a bond reaches maturity,
reinvest it into another bond.
There are certain things you must understand about
bonds before you start investing in them. Not understanding these things may
cause you to purchase the wrong bonds, at the wrong maturity date.
The three most important things that must be
considered when purchasing a bond include the par value, the maturity date, and
the coupon rate.
The par value of a bond refers to the amount of money
you will receive when the bond reaches its maturity date. In other words, you
will receive your initial investment back when the bond reaches maturity. Learn how to invest like Buffet.
The maturity date is of course the date that the bond
will reach its full value. On this date, you will receive your initial
investment, plus the interest that your money has earned.
Corporate and State and Local Government bonds can be
‘called’ before they reach their maturity, at which time the corporation or
issuing Government will return your initial investment, along with the interest
that it has earned thus far. Federal bonds cannot be ‘called.’
The coupon rate is the interest that you will receive
when the bond reaches maturity. This number is written as a percentage, and you
must use other information to find out what the interest will be. A bond that
has a par value of $2000, with a coupon rate of 5% would earn $100 per year
until it reaches maturity.
Because bonds are not issued by banks, many people
don’t understand how to go about buying one. There are two ways this can be
done.
You can use a broker or brokerage firm to make the
purchase for you or you can go directly to the Government. If you use a
brokerage, you will more than likely be charged a commission fee. If you want
to use a broker, shop around for the lowest commissions!
Purchasing directly through the Government isn’t
nearly as hard as it once was. There is a program called Treasury Direct which
will allow you to purchase bonds and all of your bonds will be held in one
account, that you will have easy access to. This will allow you to avoid using
a broker or brokerage firm.
Disclaimer: The information provided
here is only for informative purposes and nothing more. It is not in any
way to be construed as authoritative. Always consult your financial advisor
before taking any decision. It is informed to the people that this
information that is provided here is not to be acted upon. In spite of our
advise, if any person acts upon the contents of this web site and incurs a
loss, they do it on their own risk. We are not to be held responsible for
any loss, incorrect information etc.
Privacy Policy
Other pages on investing: Where to Invest When to sell Types of Stock Types of Investments Risk Tolerance Online Trading Long Term Investments Investing strategy Investing mistakes Investing for retirement Investing Basics why you should invest How much to invest choosing a broker bonds begin investing
|
