How To Buy Bonds

Bonds are considered a relatively safe investment

. Even though bonds have a good reputation, there is no absolute guarantee that the investor will be correct. Here are some basics about how to buy bonds to help you understand the best way to invest in bonds.

The most fundamental terms a bond investor must know are first: par value, second: maturity date and third: coupon rate.

'Par value' is the amount of money the bond holder will receive when the bond matures. The basic and simple idea is that the bond holder gets her or his money back when the bond matures.

The 'maturity date' is the planned date when the bond will reach its maturity. If all goes according to plan - which usually happens with bonds - the bond holder gets back his or her initial investment plus all the earned interest.

There are at least four bodies which issues bonds. The majority of bonds are issued by three levels of government - federal, state and local - and corporations. It sometimes happens that state, local and corporate bonds are 'called' before their maturity dates. 'Being called' means the bond holder is paid back before the previously-announced maturity date. .

The 'coupon rate' is the amount of interest the bond pays upon the maturity of the bond. The term 'coupon' refers to an actual piece of paper which the bond holder might have to turn in to get payment. If the value of the bond is known and the coupon - expressed in percentages - is known, it is easy to figure out the payment amounts. Imagine the bond's par value is $2000 and its coupon rate is 5%, that translates into an annual payment of $100.

Most bond buyers use one of two ways to buy the bonds themselves, and a third and fourth way to buy bonds indirectly.

Brokers and brokerage firms can help a buyer purchase bonds directly. Expect to pay a commission when using this route.

Government bond investment has been made easy by a program named Treasury Direct. Because it is, as its name says, direct, it helps the buyer avoid commissions.

The other methods of buying bonds do not result in the buyer holding an actual bond. There are mutual funds which specialize in bonds. The buyer buys the fund and the fund buys the bond. There is a special kind of fund called an Exchange Traded Fund or ETF. Mutual funds are not the same as ETFs. The difference will be described elsewhere. Whichever the buyer chooses she or he has an indirect stake in bonds.

There are many other kinds of bonds. One example is convertible bonds, which pay the buyer in stock shares instead of money.

This article does not presume to teach which is the best bond investmment But the concepts presented in this article go a long way to help an investor steer a bond investment in the right direction.

The next step is learning more about Convertible Bonds, which were one of the top investments of 2009.

How To Buy Bonds

By: Noo Yawka

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