Investing in Bonds
Investing in bonds provides a great way for investors to build a well diversified investment portfolio. Investment advisors typically recommend that investing is stocks and bonds, and cash can lead to portfolio diversification if each investment vehicle is tailored to meet individual investment objectives. Each type of investment used to build a portfolio will contain varying percentages as well in efforts to be compatible with each investors risk tolerance and investment goals. There are many key factors to take into account as well such as the bond’s interest rate, price, maturity, tax status and more. This article will discuss key factors that each investor should consider before investing in bonds.
The interest rate of a bond is a very important factor when deciding which bonds to invest in. The interest rate of a bond can be fixed, adjustable, or payable at maturity. Investing in bonds that are fixed means that it has an interest rate that remains the same until maturity and the interest rate paid out is a percentage of the principal amount. Adjustable or floating bonds contain an interest rate that is more in line with the current market rates. This type of bond is has interest rates that changes sporadically with the rate index. The last type of bond is one that pays out the interest earned plus the principal amount in one payment at maturity. When bond investing, each investor must also decide if they would like to invest in a short-term, intermediate, or long-term bond. Short term bonds typically mature within five years, with intermediate bonds maturing in five to twelve years, and long-term bonds maturing in twelve plus years. The maturity signifies the date in which the investor’s principal is repaid and can be as long as thirty years.
When investing in bonds, there are facts that each investor should understand. For starters, it is important to note that you can lose when investing money in bonds and their price moves in the opposite direction of interest rates. When interest rates fall, bond prices rise, but if you hold onto the bond until maturity, then it doesn’t matter. You will fortunately get the original face value of the bond, plus any interest earned. You should also note that stocks do not always outperform bonds so you should look into investing in bonds and also into investing in stocks to diversify your portfolio.
It is also important to note how an investor can go about investing in bonds. They can either purchase it through a broker, through a mutual fund, or directly from the government. When going through a broker it is wise to buy new issues at wholesale whenever possible. You can also go through your broker to invest in bonds that are older and that are traded on the “secondary market.” This typically takes place over-the-counter instead of on a stock exchange such as the New York Stock Exchange but transaction costs are much higher. Bonds purchased through mutual funds are for investors who would like to invest in dozens of bonds with the benefit of a fund manager who makes the decisions. These types of bond funds are also more liquid that individual bonds issues. The last way to purchase bonds is to buy them directly from the federal government at regularly schedule auctions. The cheapest way to do this is to buy them directly from the U.S. Treasury to avoid any bank or broker fees.
Now that you know a little bit about investing in bonds please continue to research and increase your knowledge in order to invest wisely.