subject: Understand Bonds Before You Buy [print this page] Before investing in bonds you must first understand them. Not doing so may result in you purchasing the wrong ones, at the wrong maturity date.
The three vital features that you must consider when looking to purchase a bond are the par value, the coupon rate and the maturity date.
The par value simply stands for the amount of money you will receive when the bond reaches its maturity date.
The maturity date is the date that the bond will reach its full value. On this date, you will receive your initial investment back, as well as any interest that your money has earned.
Corporate and State and Local Government bonds can be "called" before they reach their maturity, at which time the corporation or issuing Government will return your initial investment, along with the interest that it has earned thus far. Federal bonds cannot be "called."
Finally the coupon rate is the value of interest that has accrued when the bond reaches its maturity date. This will be shown as a percentage, so you should use other information to find out what the amount of interest will actually be. For example a bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until its maturity date comes round.
Bonds are not issued by banks, so this means very few people actually know how to go about buying one. There are two ways to do this. To purchase bonds you can either employ the help of a brokerage firm or broker, or if you prefer you can go to the government directly to purchase for yourself. Using a broker will normally incur a commission fee, so if this is what you"d prefer to do shop around first for ones that offer the lowest commission.
Purchasing directly from the government is much easier than it used to be. There is a program called Treasury Direct which will allow you to purchase bonds and all of your bonds will be held in one account, that you will have easy access to. This will leave you the option to avoid using a broker and forking out the commission fee.
As with any type of investment, it is wise to seek professional advice or do as much research as you can before you purchase anything.
by: james galloway
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