Bond Investing Tips
Read these 7 Bond Investing Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Investing tips and hundreds of other topics.
Corporate Bonds
Include corporate bonds in your bond investing strategy to get the highest interest rates. Corporate bonds are bonds issued by businesses. These bonds are sold and traded much like stocks. Because there is a chance that the corporation may fold during the term of the bond, interest rates are often higher than for government bonds.
Junk bonds are a type of corporate bond issued by a company with a low credit score. Although interest rates for junk bonds are higher than for their conservative counterparts, the risk of default is also much higher as well. For this reason, it is best for most investors to stick with the traditional corporate bond.
Federal Government Bonds
Treasuries, or federal government bonds, are a good option for people in high tax brackets who can use a tax break. Any interest earned on a treasury bond is tax-free from both state and local taxes.
Because the federal government is not likely to go bankrupt, treasuries are a very stable type of bond. This means that they also offer low interest rates. Bond investing in treasuries is safe, but not as lucrative as other bond investments.
Evaluating Bonds
Before you begin bond investing, evaluate different bonds. When comparing bonds, look at the par value, the coupon rate, the maturity date and whether or not the issuing organization will have the right to call the bond early.
The par value is the amount of money that will be paid to you when the bond matures. The coupon rate is the amount of interest you will be paid periodically throughout the life of the bond. The maturity date is the date that the issuing organization will pay you the par value.
Although the maturity date is a fixed date, a company that retains the right to call a bond may decide to return the par value to you early.
Bond Ratings
Before you leap into bond investing, look at a bond's rating to get a good idea of how risky the bond is. Bond ratings are issued by several different ratings institutions. Each institution has a slightly different method for rating, so look into a few different ratings to get a good overall picture of a bond's safety.
In general, the safest bonds will have a rating that begins with A, such as AAA or Aa1. The more risky a bond becomes, the further down the alphabet its rating is until it reaches D for default.
Bond Mutual Funds
Because timing the bond market is so tricky, you're probably better off doing your bond investing through bond mutual funds. Bond funds are available in a variety of risk levels and with a variety of returns. Funds that specialize in shorter-term funds are safer than those that specialize in longer-term funds. As with other investments, safer bond funds mean less of a return. Ask for a bond fund prospectus and check out the companies represented in the portfolio before making any decisions about bond fund investing.
Municipal Bonds
Include municipal bonds in your bond investing strategy to earn interest that is exempt from federal taxes. Municipal bonds are bonds offered by state or local governments to allow them to borrow money and avoid raising taxes. Because a state or local government has a chance of going bankrupt, the interest rates offered by these bonds are higher than with federal bonds. State or local issued bonds are also called Municipal bonds.
Church or Synagoge Bonds
Churches and synagogues occasionally offer bonds to members in order to help pay for improvements or management costs. Unless you are wealthy and have a significant amount invested elsewhere, find another way to donate to your religious community. These bonds commonly don't provide a competitive return and should be avoided as a bond investing strategy.
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