Understanding Bonds
Understanding Bonds
There are certain things you must
understand about bonds before you start investing in them. Not understanding
these things may cause you to purchase the wrong bonds, at the wrong maturity
date.
The three most important things that
must be considered when purchasing a bond include the par value, the maturity
date, and the coupon rate.
The par value of a bond refers to the
amount of money you will receive when the bond reaches its maturity date. In
other words, you will receive your initial investment back when the bond
reaches maturity.
The maturity date is, of course, the
date that the bond will reach its full value. On this date, you will receive
your initial investment, plus the 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.’
The coupon rate is the interest that
you will receive when the bond reaches maturity. This number is written as a
percentage, and you must use other information to find out what the interest
will be. A bond that has a par value of $2000, with a coupon rate of 5% would
earn $100 per year until it reaches maturity.
Because bonds are not issued by
banks, many people don’t understand how to go about buying one. There are two
ways this can be done.
You can use a broker or brokerage
firm to make the purchase for you or you can go directly to the Government. If
you use a brokerage, you will more than likely be charged a commission fee. If
you want to use a broker, shop around for the lowest commissions!
Purchasing directly through the
Government isn’t nearly as hard as it once was. 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 allow
you to avoid using a broker or brokerage firm.
0 Response to "Understanding Bonds"
Post a Comment