Understanding Bonds

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Understanding Bonds

Bonds sound boring, but they’re not. Nor are they a nice safe haven for rich and retired folks who never want to lose money. They have a role to play in your investment plan for several important reasons. There are certain things you must understand about bonds before you begin investing in them. Not understanding these things may cause you to buy the wrong bonds, at the wrong due date.

The three most important things that must be considered when buying a bond include the par value, the due date, and the voucher rate.

The par value of a bond refers to the amount of money you’ll receive when the bond reaches its due date. In other words, you’ll receive your initial investment back when the bond reaches due date.

The due date is naturally the date that the bond will reach its full value. On this date, you’ll receive your first investment, plus the interest that your money has earned.

Corporate and State and Local Government bonds may be ‘called’ before they reach their maturity date, at which time the corporation or issuing Government will bring back your first investment, along with the interest that it’s earned thus far. Federal bonds can’t be ‘called.’

The voucher rate is the interest that you’ll receive when the bond reaches maturity date. This number is written as a percentage, and you must use other information to check what the interest will be. A bond that’s a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches maturity date.

As bonds are not issued by banks, many people don’t understand how to go about purchasing one. There are two ways this may be done.

You may use a broker or brokerage firm to make the buy for you or you may go directly to the Government. If you use a brokerage, you’ll more than likely be charged a commission fee. If you would like to use a broker, shop around for the lowest commissions!

Buying directly through the Government isn’t nearly as hard as it once was. There’s a program called Treasury Direct which will allow you to buy bonds and all of your bonds will be held in one account, that you’ll have easy access to. This will allow you to avoid using a broker or brokerage firm.

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February 24 2009 04:33 am | Uncategorized

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