Learning About Bonds
There are a couple of things you must understand about bonds prior to 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 need to be thought of when getting a bond involve the par value, the maturity date, and the coupon rate.
The par value of a bond pertains to the amount of cash you will get when the bond reaches its maturity date. Basically, you will receive your initial investment back when the bond hits maturity.
The maturity date is of course the date that the bond will hit its full value. On this date, you will get your initial investment, plus the interest that your money has made.
Corporate and State and Local Government bonds can be ‘called’ before reaching their maturity, at which time the corporation or issuing Government will give back your initial investment, along with the interest that it has made so far. Federal bonds cannot be ‘called.’
The coupon rate is the interest that you will get when the bond reaches maturity. This amount is recorded as a percentage, and you should use other details 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 just before it arrives at maturity.
Because bonds are not issued by banks, a lot of people don’t understand how to go about buying one. There are two ways by which you can do this.
You can use a broker or brokerage firm to setup the purchase for you or you can go straight to the Government. If you use a brokerage, you will more than likely be charged commission. If you would like to use a broker, search around for the lowest commissions!
Acquiring straight through the Government isn’t nearly as hard as it once was. There is a program called Treasury Direct which will enable you to buy 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.
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