Investing in Bonds

Investing in bonds allows investors a wonderful means to construct an investment portfolio that is well-diversified. The investment in stocks and bonds and cash can lead to portfolio diversification if each investment vehicle is tailored to meet individual investment objectives so that is what the investment advisors typically recommend. Using efforts to be compatible with every investor’s different risk tolerance and investment goals, the different portfolios contain varying percentages. Many important factors also need to be taken in consideration such as the interest rate on bonds, price, maturity, tax status etc. The relevant information regarding the key factors to be taken in consideration by any investor before deciding to invest in bonds will be discussed in this article.

While making the decision as to which bonds one should invest, in a very important factor should be the interest rates of the bonds. Bonds are available with interest rates that are fixed, adjustable, or payable when they mature. A bond that is fixed means that the interest rate is the same until maturity and the interest rate that is paid is a percentage of the principal amount. Floating or adjustable bonds are comprised of an interest rate that tracks closely with current market rates. The interest rates change sporadically with the rate index for this type of bond. The final type of bond is one that pays out the interest earned plus the principal amount in a single payment at when the bond matures. Part of the decision-making process when bond investing is to choose whether to invest in short-term bonds, intermediate or long-term ones. It usually takes short-term bonds five years to mature; intermediate bonds take five to twelve years, and long-term bonds take more than twelve years to reach maturity. The term maturity indicates the date when the principal amount invested by the investor is repaid. This time period can be of varied lengths and can be as long as thirty years.

Each investor should understand the facts when investing in bonds. The beginners in the field should be aware of the fact that there is a possibility of losing money while investing money in bonds and that their price moves in the direction opposite of interest rates. If you hold onto the bond until maturity, then it doesn’t matter when interest rates fall, bond prices rise. At maturity you’ll receive the amount written on the face of the bond as well as any interest that has accrued. Be aware that stocks do not always outperform bonds, so you should research bond investments and investing in stocks so that your portfolio is diversified.

It’s mandatory to gain an understanding on how an investor proceededs to invest in various bonds. They have the option of buying through a broker, a mutual fund, or straight from the government. If you are planning to buy through a broker it would be prudent to purchase fresh issues at wholesale as far as possible. The broker can also help you in investing in bonds that are older and are traded in the ‘secondary market.’ This is normally done over-the-counter and not on a stock exchange such as the New York Stock Exchange, however the costs for transactions are much higher here. The investors who would like to invest in dozens of bonds with the benefit of a fund manager who makes the decisions for the bonds purchase through mutual funds. These kinds of bond funds have more liquidity compared to individual bond issues. One final way you can buy bonds is to purchase them at the auctions held by the U.S. government. The most inexpensive method to accomplish this is to purchase them directly from the U.S. Treasury to prevent having to pay bank or broker fees.

Now that you have been briefed with an overview about bond investments, you should do your own research so that you will be well educated when it comes to making wise investments.

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    • bercjhta dale
    • September 4, 2008

    Before you invest in bonds it is important to know how bonds work. Bonds can be complicated to understand at first since there are many types of bonds and therefore many rules. It is also more important to understand how bonds work when you invest in bonds because people usually invest in bonds for the interest payments as well as redemption value which are something in the future. While when a stock goes down in value you know you are losing money, when a bond goes down in value, you may not be losing money but if you understand perfectly how your bonds work.

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