Bonds are issued by various entities. This article will concentrate on the bonds available in the US. The most common entities in todays market are the Federal Government, states, municipalities and various business entities. All have advantagaes, some drawbacks. The following paragraph will discuss these in general. Investing in bonds is a way of preserving your capital. It will not fluctuate as wildly as the stock market does, but remember that in terms of capital appreciation, it will not keep up with inflation and the cost of living either.
From the US Government
The safest bond anyone can invest in are US Treasury Bonds, Notes or Bills. All three are similar. The terminology has to do more with maturity time and amount needed to purchase the bond.
Treasury bills or T-bills need a minimum of $10000 for an investment to be made. T-bills usually are short maturity bonds that will mature within a year. Treasury notes and bonds are of longer duration and can be purchased in $1000 increments. These bonds are the safest because of the implied condition that the US government will print money, if necessary, to cover its debts. The advantages of this are obvious. Any entity that can print money will not default on its loans. They are always AAA rated. The interest you recieve is state tax exempt, but are federally taxaxable. The only disadvantage is that you pay a bit more for the safety of the bond and wil recieve a little less interest than what is currently being offered in the bond markets.
Other US Government Products
Other federal bonds available are Freddie Macs, Ginnie Maes and Farm Credits. They are a form of assistance for housing and mortgages that are offered to the general public. The difference between these and the treasuries is that they aren't backed by the same money printing implication as the others. However, considering the effect that a US government default on its bonds would have in the world, the chances of this happening are very slim indeed. Most are AAA rated. They give considerably more interest than treasuries, for almost the same safety. They are federally taxable and some are state taxable, while others are state tax exempt. You'd need to consult your brokerage firm as to which ones are taxable or tax-exempt.
Municipal Bonds
Municipal bonds, are bonds issued by states and municipalities. Some are insured, while others aren't. They aren't as safe as government bonds, because states can't print money. However, if you stick to insured bonds or bonds rated AA or higher, there are other advantages that these bonds offer. To purchase these bonds you'll need an investment of $5000 or higher since they are sold in $5000 increments. Municipal bonds are federally tax exempt and are state tax exempt if the municipality of the bond you bought is the same as the one you live in. If you purchase an out of state municipal bond, then they will be only state taxable and still federally tax exempt. Municipal bonds are good for those in higher tax brackets, who need to get income, yet don't want to increase their tax burden. They are relatively more expensive that other bonds.
Corporate Earnings
Corporate bonds are issued by companies. Although least safe of all, they do issue higher interest rates than the others types of bonds available. Interest is fully taxable and the bonds are non-insured. Since companies can go bankrupt, you'll need to stay with bonds rated AA or AAA.
Pool Your Money
Finally, there is another way to buy bonds. If you don't have a lot to invest and buying individual bonds is out of the question, then consider buying bond mutual funds. Depending on the company running the fund, you can purchase these for a fraction of the cost of a single bond. There are literally hundreds of bond funds available, in all the different types of bonds mentioned above. The advantage is that you can actually invest in riskier bonds and get higher interest. Since the funds carry thousands of bonds, one or two defaults will not affect the overall portfolio. On the other hand, your bond shares will fluctuate with the times. You aren't buying them face value, as you would individual bonds. Funds will continuously buy and sell bonds based on values posted daily. If they can make a profit they'll sell them and go and invest elsewhere. If the bonds go down in value, so will the shares of your fund. So when it comes time to redeem your bond fund shares, realize that the price per share may be more or less than what you paid.
Although this subject is extensive reading bookswill further your knowledge. Stick to the above and do not wander into unsafe investment vehicles. Bond trading, a subject onto itself, should be left to the pros. There are many ways to invest in bonds. Pick the one best suitable for you.
From the US Government
The safest bond anyone can invest in are US Treasury Bonds, Notes or Bills. All three are similar. The terminology has to do more with maturity time and amount needed to purchase the bond.
Treasury bills or T-bills need a minimum of $10000 for an investment to be made. T-bills usually are short maturity bonds that will mature within a year. Treasury notes and bonds are of longer duration and can be purchased in $1000 increments. These bonds are the safest because of the implied condition that the US government will print money, if necessary, to cover its debts. The advantages of this are obvious. Any entity that can print money will not default on its loans. They are always AAA rated. The interest you recieve is state tax exempt, but are federally taxaxable. The only disadvantage is that you pay a bit more for the safety of the bond and wil recieve a little less interest than what is currently being offered in the bond markets.
Other US Government Products
Other federal bonds available are Freddie Macs, Ginnie Maes and Farm Credits. They are a form of assistance for housing and mortgages that are offered to the general public. The difference between these and the treasuries is that they aren't backed by the same money printing implication as the others. However, considering the effect that a US government default on its bonds would have in the world, the chances of this happening are very slim indeed. Most are AAA rated. They give considerably more interest than treasuries, for almost the same safety. They are federally taxable and some are state taxable, while others are state tax exempt. You'd need to consult your brokerage firm as to which ones are taxable or tax-exempt.
Municipal Bonds
Municipal bonds, are bonds issued by states and municipalities. Some are insured, while others aren't. They aren't as safe as government bonds, because states can't print money. However, if you stick to insured bonds or bonds rated AA or higher, there are other advantages that these bonds offer. To purchase these bonds you'll need an investment of $5000 or higher since they are sold in $5000 increments. Municipal bonds are federally tax exempt and are state tax exempt if the municipality of the bond you bought is the same as the one you live in. If you purchase an out of state municipal bond, then they will be only state taxable and still federally tax exempt. Municipal bonds are good for those in higher tax brackets, who need to get income, yet don't want to increase their tax burden. They are relatively more expensive that other bonds.
Corporate Earnings
Corporate bonds are issued by companies. Although least safe of all, they do issue higher interest rates than the others types of bonds available. Interest is fully taxable and the bonds are non-insured. Since companies can go bankrupt, you'll need to stay with bonds rated AA or AAA.
Pool Your Money
Finally, there is another way to buy bonds. If you don't have a lot to invest and buying individual bonds is out of the question, then consider buying bond mutual funds. Depending on the company running the fund, you can purchase these for a fraction of the cost of a single bond. There are literally hundreds of bond funds available, in all the different types of bonds mentioned above. The advantage is that you can actually invest in riskier bonds and get higher interest. Since the funds carry thousands of bonds, one or two defaults will not affect the overall portfolio. On the other hand, your bond shares will fluctuate with the times. You aren't buying them face value, as you would individual bonds. Funds will continuously buy and sell bonds based on values posted daily. If they can make a profit they'll sell them and go and invest elsewhere. If the bonds go down in value, so will the shares of your fund. So when it comes time to redeem your bond fund shares, realize that the price per share may be more or less than what you paid.
Although this subject is extensive reading bookswill further your knowledge. Stick to the above and do not wander into unsafe investment vehicles. Bond trading, a subject onto itself, should be left to the pros. There are many ways to invest in bonds. Pick the one best suitable for you.
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