Buying and Selling Municipal, Junk and Treasury Bonds
When purchasing bonds for your portfolio, it is important to understand your goals. These goals and your time horizon will affect the best type of bonds for you. If you are looking for capital appreciation, your best bet is to go with bonds with long-term maturities. These bonds tend to be more sensitive to interest rate fluctuations and therefore will provide greater appreciation if interest rates decrease (of course, they will also lose more if rates increase). They also usually have higher yields than short-term bonds. Alternatively, if you are looking for a more stable investment, shorter maturities will lead to decreased volatility.
For investors in a high federal tax bracket, municipal bonds provide some tax relief.
Instead of buying and selling individual bonds, it is also possible to invest in mutual funds that hold positions in a large number of bonds, increasing diversity and reducing the risk that accompanies owning bonds from only one company or institution. Mutual funds also eliminate problems with limited secondary markets by allowing investors to buy and sell at any time. There is no maturity date for mutual funds (since they continuously buy and sell bonds of different maturities), so some of the considerations involved with risk and time horizons differ from those associated with individual bonds. Funds may also be more accessible for some investors who cannot meet the minimum investments for some fixed-income securities.
By InvestorGuide Staff