How to Invest in Bonds

A bond is a debt security, so when an investor purchases a bond, they are effectively lending money to the bond’s issuer. In exchange for the loan, the issuer promises to pay a specified periodic return or coupon, as well as to repay the principal amount of the bond to the investor when it matures.

A variety of bonds are available for investors to purchase for their portfolio, and the types are worth reviewing when optimizing how to invest in bonds. These include government or federal agency debt, municipal or corporate bonds, and mortgage or asset-backed securities.

Furthermore, two basic ways how to invest in bonds exist.
The first involves buying particular bonds from a dealer or broker in the over the counter market. This involves selecting a particular bond or set of bonds to purchase based on your investment criteria. Most investors purchase and sell individual bonds in the secondary market after they have already been issues, but you may also qualify to participate in a new bond’s issuance in the primary market. Some corporate bonds are listed on major stock exchanges.

The second method involves purchasing shares in a bond fund, money market fund or unit investment trust where bond investments are pooled for diversification purposes.  The bond funds typically charge a fee to professionally actively manage a portfolio of bonds, although some funds are passively managed to follow a particular bond index or market. Money market funds typically pool investments in very liquid securities with a short time until maturity that is often under three months.

Bond Unit Investment Trusts offer investors a portion of a set of professionally chosen bonds that remains constant for the trust’s duration.  Typically, interest income is earned over time from the bonds and principal is returned as the bonds mature until the last bond has matured.

Determining how to invest in bonds to suit your portfolio will typically involve selecting between these different options according to your market view, income preferences, investment capital, and risk tolerance.
By InvestorGuide Staff

Copyrighted 2016. Content published with author's permission.

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