Choices
Bonds
With bonds, instead of buying part of a company like stocks, you loan money to the company which the company repays with interest. You make money on bonds through the interest paid and/or price appreciation. Bonds pay fixed returns, so you know when you purchase a bond how much money you’ll potentially make. But, bonds can LOSE money as well.
So How Does that Work?
You purchase a bond for a set amount typically under $1,000. Then, at maturity, issuer will pay you $1,000 which is your price plus interest. Bonds can be sold before they reach maturity.
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Interest (coupon rate) is set when you purchase the bond – so it won’t change or decrease.
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Bond prices fluctuate with interest rates. When interest rates rise, bond prices go down. If this happens, the bond becomes less valuable and will be difficult to sell.
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Since the bond market is often rising when the stock market is falling (and vice versa), bonds make a good complement to stocks in a diversified portfolio. In fact, many mutual funds include bonds in their portfolio for that reason.
Bond Terms to Know
Coupon rate: Measures the annual income a bond investor receives as a percent of the bond’s par value. For example, if a bond has a par value of $1,000 and has a coupon rate of 5%, the bond investor would receive $50 per year.
Face value (or par value): This is the amount the bond is issued at, typically $1,000. Don’t confuse this with the amount of money you will need to purchase a bond; rather this is the amount of money that will be handed to you once the bond matures. For example, it may be possible to buy a discounted bond with a face value of $1,000 for $900. You pay $900 today and once the bond matures in a few years you will receive $1,000.
Time to Maturity: this is the amount of time before your bond matures and you would be able to cash in the bond for the face value.
Yield to Maturity: Indicates the full compounded rate of return promised to an investor who buys the bond. In other words it is the annualized rate of return for the bond considering what you paid, what you are promised, and what interest you will receive. It does assume that you would invest any interest received and that you will hold the bond until maturity.
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Types of Bonds
Where do I buy bonds?
The most common way to buy bonds, much like stocks, is to use a brokerage account. You can either use a full-service (or full-price) broker or a discount broker to execute your trades.
To buy U.S. government bonds, the Bureau of the Public Debt started the TreasuryDirect program. This program enables individuals to purchase bonds directly from the Treasury
You can also purchase bonds through a mutual fund.